Long-term loans are an important option to consider if you’re looking for a lower monthly payment. Many lenders offer applications online, so once you’ve identified your options, you can apply for a loan online, submit your documents, and sometimes even find out if you’ve been approved within minutes. Before committing to a long-term loan, evaluate the positives and negatives to ensure it’s the best decision for you.
What is a long-term loan?
Technically, long-term loans are not a specific type of personal loan product. Instead, the term refers to loans with longer repayment periods, typically more than 60 months. Longer terms are not common in personal loans, so it may take some research to find a long-term loan.
Long-term personal loans include those that last more than 60 months. Other types of long-term loans include 15 and 30-year mortgages and auto loans for more than 60 months. Another example of a long-term loan that is not a personal loan is a federal student loan, where fixed payments are made on the standard repayment plan for up to 10 years.
Note: Using a personal loan or another type of loan to refinance federal student loans will affect your repayment options and the chance of obtaining loan forgiveness.
When should long-term loans be used?
Long-term personal loans can be used to meet various financing needs, including home improvements, education expenses for a primary and secondary student, medical expenses, and debt consolidation. You may want to use them when they fit your financial situation.
You want or need a lower monthly payment
A long-term loan may be the preferred option if you cannot afford a high monthly loan payment, or if you want to keep your payment low to avoid straining your budget. For example, a $20,000 personal loan at 15% interest and a five-year repayment term would cost $475.80 per month. If the loan term is longer, such as 10 years, the monthly payment would be lower: $322.67.
While the difference in interest paid over time is significant – $8,547.88 versus $18,720.38 – individuals who need a loan that aligns with their current financial situation may find the long-term loan to be the best option.
Note: Use a personal loan calculator to better understand how different loan terms affect the monthly payment to find the best option for you.
You need a larger loan
The amount you qualify for is partially based on your ability to afford the monthly payment. By spreading your payments over a longer time period, this reduces the monthly payment, giving you the opportunity to qualify for a larger loan amount. If your financial needs are relatively high, a long-term personal loan may be the best option for obtaining a significant loan amount.
Some lenders set a minimum loan amount for long repayment terms. For example, Navy Federal Credit Union imposes a minimum of $25,000 for loans exceeding 60 months.
Advantages and disadvantages of long-term personal loans
Advantages
- Lower monthly payments: Extending the loan over a longer time frame gives you the benefit of a lower monthly payment. This makes the loan more affordable and provides you with flexibility in your budget.
- More
Time for repayment: This means that having a longer time frame means you are not forced to rush to pay off the debt quickly, unless you are able to do so.
Disadvantages
- Higher interest rates typically: Some lenders may only offer long-term loans with higher interest rates, even if you have a good credit history.
- Higher total cost: Since the loan is spread over a longer period and the interest rate is higher, the cost of borrowing will be higher than choosing a loan with a shorter term.
Note: The exact interest rate depends on the loan amount, loan duration, and your credit score.
Long-term loan costs
The costs associated with a long-term loan vary by type. The interest rate is often based on the use of the loan, as well as your credit score and credit history. In some cases, a discount may apply if you enroll in automatic payments.
There may also be origination fees on personal loans. This additional cost – which can range from 1% to 8% of the loan amount, depending on the lender – is what many lenders charge to process, underwrite, fund, and administer the loan.
Potential long-term loan cost
Here is a real example of a long-term loan currently available in the market. The online lender LightStream offers long-term loans of up to 144 months (12 years). According to its website, LightStream’s interest rates on a $30,000 loan intended for home improvement can range from 7.99% to 25.99% annually, depending on the repayment term and your credit evaluation.
LightStream states that its lowest rates are offered to borrowers with excellent credit scores – 800 or higher – who are also
Source: https://www.thebalancemoney.com/what-to-know-about-long-term-loans-5203700
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