Long-term loans can be an excellent way to finance the purchase of expensive goods such as properties and cars, as well as long-term personal loans and secured loans for a wide variety of purposes.
If you are looking into your options for long-term finance, it is important to understand what type of long-term loan is right for you, as well as what is the longest term you can get on a loan. In this guide, we’ll explain exactly what long-term loans are and how they work, plus discuss the different types of long-term loans and the pros and cons of long-term finance.
What is a long-term loan?
Long-term loans involve borrowing money and then repaying the debt over a period of time lasting longer than a year. This period of time is called a term, and most long-term loan terms last between two and seven years. As home loans are usually one of the largest long-term loans you can get, their repayment periods are also the largest and can be as long as 35 years.
There is interest added on to the repayments for long-term loans, but the rates are often lower than short-term loans (as explained below), plus the monthly repayments are generally lower and, as a result, much more manageable. However, by borrowing over the longer term, you may pay more interest over the length of the loan.
How does a long-term loan differ from a short term loan?
Short-term loans have higher interest rates than long-term loans as they are considered much riskier for lenders. Most long-term loans are secured against an asset and so are much less risky.
The lower interest rates on long-term finance don’t automatically make longer-term loans cheaper than short-term loans. Several additional factors can make a significant difference, such as fees and charges. Many short-term loans also allow extra repayments to be made without charge so the debt can be paid off faster, while some long-term loans incur fees for faster repayment.
All such factors need to be considered and calculated before determining what length of loan is better for you.
Types of long-term loans
Long-term loans all involve paying off the loan over a longer period of time, but there are different types of long-term loans that have different requirements.
A home loan is commonly referred to as a mortgage, which is a type of long-term loan that finances the purchase of a property. When you take out a home loan to buy a property, you borrow the lump sum from a lender which goes to the seller, and you then pay the lender back in monthly instalments. The debt is secured against the property itself, meaning the lender will take legal possession of the property should you fail to maintain your loan repayments.
Home loans are not the only kind of loan that is secured against an asset. Any asset considered valuable to a lender may be used as collateral to take out a long-term loan, such as secured loans or a car loan.
Long-term loans can also be used to pay for education, and small businesses often use them to finance their operations and investments.
Advantages and disadvantages of long-term loans
You should never move too quickly when taking out any kind of loan, and you should consider all the pros and cons before making a decision. Long-term loans in particular are a serious commitment that shouldn’t be rushed into, whether the timeframe is just a couple of years or much longer.
Let’s look at some specific advantages and disadvantages of long-term loans.
Advantages of long-term loans
The repayments of home loans and long-term personal loans can be significantly easier to manage on a monthly basis because they are spread over a much longer period. This longer-term repayment structure is what also allows you to borrow larger amounts of money.
Continually paying off a long-term debt with no late or missed payments can eventually improve your credit rating as you are regularly demonstrating that you can manage debt repayments. A lot of long-term loans also offer some flexibility with regard to the exact length of the loan tenure.
A home loan with a fixed rate has its own advantage as the fixed rate provides stability, as you will know how much your monthly repayments will be for the entire duration of the agreed fixed-rate period.
Disadvantages of long-term loans
Even with lower interest rates, you will ultimately be paying back more overall due to the longer timeframe and thus be making more repayments with interest. Lenders often rely on that cumulative interest over a longer tenure, thus they are less flexible when it comes to allowing you to make early repayments. Such early repayments in part or in full could incur additional fees to compensate for the loss of the long-term interest.
Even some unsecured loans require an asset to be used as collateral in the event of defaulting on repayments. Assets need to be of significant value, such as a car, or even your house in the case of a home loan. Thus, defaulting on repayments could mean losing the asset.
A home loan with a variable rate mortgage means the monthly repayments may fluctuate according to general interest rates, either decreasing or increasing the amount you must pay each month.
How to qualify for a long-term loan
Qualifying for a long-term loan will depend on the type of loan you are applying for. Some Home loan lenders will have a minimum credit score rating that you must achieve, with better credit scores opening possibilities for better rates. You will need to demonstrate you have a reliable income that covers the loan repayments and more if your repayments increase. You will also need to be able to pay the minimum down payment percentage.
Having an imperfect credit rating doesn’t necessarily stop you from successfully applying for a long-term loan such as a home loan, but it will usually mean you have to pay a higher interest rate than a borrower with a good credit rating.
If you are looking for a homeowner loan, contact one of our trusted broker partners for more information.