When it comes to big-budget loans over longer terms, most of us rule out personal loans. That’s because the conventional outlook about personal loans is that they’re only granted for relatively shorter terms – 1 to 3 years.
Contrary to this notion, personal loans are available for more extended terms and allow you to borrow sizeable amounts. Although, the borrowing limit and term lengths depend on your financial circumstances and credit standing.
Long term personal loans can help you finance big-ticket ventures via easy monthly instalments over a fixed repayment period. But when should you consider a long term loan over run-off-the-mill loan options?
Read on to find out!
What are long term loans?
Long term loans are a credit solution to help you cover some high-priced expenses over an extended term. Long-term loans are colloquially known as 10-year loans because the repayment period for these loans is over five years. You can use them to cover expenses like home improvement, business investments, purchase of fixed assets, etc.
Long term loans allow you to spread the cost of your venture into affordable monthly instalments over a period of 5 years or more. Fixed monthly instalments allow you to plan your monthly budget more efficiently because you owe the same amount of money on your loan each month.
Since there’s ample time to repay the loan, long term loans usually have small monthly instalments. Affordable instalments are much easier to juggle with ongoing debt repayments and monthly household expenses.
However, a longer repayment period could accrue you greater interest over time. This is because the longer your loan has an outstanding balance, the longer you will have to pay interest on payments.
Thus, a repayment term of 7 years can accrue you more interest than a 10-year repayment term. Even if you fetch an offer with low interest rates, you might end up paying more interest if the term is long. Therefore, a long term loan could be a more expensive choice on the whole.
How do long personal loans work?
While you can settle a short term loan within 1-3 years, the typical repayment period for long term loans is over five years. Applying for loans with a good credit score and income source could increase your likelihood of qualifying for competitive rates and longer terms. Although, it would be best to consider this loan’s long-term implications, especially in terms of interest.
The sooner your pay off your long term loan, the better. Even low-interest loans accrue great interest if not paid off soon. You’ll have to pay interest on your repayments for as long as your loan has a balance. You may be better off with a loan wherein you don’t incur early repayment charges, giving you more control over repayments.
Here’s what lenders assess in your application:
- Credit history/score
- Loan amount
- Loan term
- Debt-to-income ratio
- Credit utilisation
As long as you fit the lender’s checklist, they will most likely offer you better interest rates, higher borrowing limits as well as longer terms for loans. But to truly prosper from a long term loan, you must take the Annual Percentage Rate (APR) into account when comparing loans.
APR gives you the overall cost of borrowing a loan, expressed as a percentage. The APR is an all-encompassing value that includes all the additional charges associated with your loan – early repayment charge, loan origination fee, missed payment penalty, etc.
An offer with a low interest rate may have a higher APR – meaning that a particular lender imposes hefty charges other than the loan’s interest. This could be a late payment fee or prepayment charge. Therefore, it is important to consider these extrinsic factors.
As a responsible borrower, you should ensure timely repayments towards your loan. Lenders report your updated repayment history to credit bureaus each month. Where a punctual payment can boost your credit score, missed payment could cost you 80 credit points. Furthermore, defaults could cause the lender to pursue you with a CCJ, pulling down your score by 250 points.
Defaults can have serious ramifications. This kind of damage to your credit score can impede your future credit requirements and impact your financial goals. Thus, it is critical for you to make an informed decision by assessing your affordability before applying for the loan.
When to consider a long term unsecured loan?
Long term loans are ideal for people seeking credit solutions with payment flexibility and affordable instalments that are easier on the pocket. Such an arrangement helps cover hefty costs without burning a hole in your pocket.
Moreover, people with a variable or commission-based income may find long-term loans a better option, owing to the better affordability of the monthly instalments. Smaller instalments make it easier to finance asset-building ventures.
Although, expecting offers with smaller repayments and greater flexibility is like wanting the best of both worlds. However, to bring this ideal scenario to fruition, you will need to find a lender who does not impose an early repayment charge.
Applying with such lenders will give you better payment flexibility and more control over repayments. Sometimes you may have extra money to spare or get an increment in your job or a performance bonus. This way, you’ll be able to pay an extra sum now and then without incurring any additional costs.
However, it would be best to consider the interest implications associated with long term loans before opting for one. An extended-term could accrue more interest for you. So, think your decision through, weigh the pros and cons, and check if the loan’s terms and conditions align with your current financial situation.
If you handle credit responsibly, long term loans can be an excellent opportunity for you to establish/improve your credit history. Smaller monthly payments are easier to juggle with monthly expenses – ongoing debt repayments and household expenses. A long term loan without prepayment charges will give you better control over repayments if you wish to repay the loan early.