Long-term loans may provide you with a more affordable repayment schedule.
They may also be a better option for certain types of expenses. For example, if you’re going to renovate your home in the hopes of increasing its value substantially, you will need a lot of money. A long-term personal loan can often provide the balance, as well as lower repayments.
On the flip side, long-term personal loans come with a few downsides. In this article, we will look at:
A typical long-term personal loan will last from 5 to 7 years. However, longer-term personal loans may also be available to you. It’s uncommon but far from unheard of to take a personal loan for up to 15 years.
By the conventional definition, a “long-term” personal loan is one that lasts over 5 years. So, if you’re considering a smaller loan you want to pay back faster than half a decade from now, a long-term loan isn’t what you’re looking for.
Of course, mortgages and some home equity loan products last far longer. But these don’t meet the definition of “personal” loans.
The longest term for a personal loan that you can realistically expect to get is 15 years. These aren’t your typical long-term loans, however. Again, standard terms for long-term personal loans are 5 years (60 months) and 7 years (84 months).
There are a few key differences between short- and long-term personal loans.
The main differences are their interest rates and the amount you can expect to pay with each repayment.
Long-term loans typically carry higher interest rates than their short-term counterparts. This is their main drawback.
The flip side is that your monthly repayments will still normally be much lower than they would be with a short-term loan. This makes a long-term loan more affordable for many people, even if it costs them more in total.
Your precise interest rate will depend on the lender you choose, your credit score, debt-to-income ratio, and other creditworthiness factors.
The actual difference between short-term and long-term personal loan interest rates isn’t monumental. Your APR for a longer-term loan may be just a few percentage points higher than the short-term alternative.
Even if your APR were twice as high because you chose a long-term loan (this doesn’t normally happen), you would still pay far less on a monthly basis.
Let’s look at a quick but extreme comparison of APR vs term length for a loan of $15,000:
a) 3-year repayment period at 5%
b) 7-year repayment period at 10%
With loan a, you would pay $1,184.28 in interest over the life of the loan and $449.56 per month.
With loan b, you would pay $5,917.49 in interest over the life of the loan, but only $249.02 per month.
Of course, as a thought experiment, you can use a personal loan calculator to see the results for a more realistic matchup (same loan term, but a smaller APR difference). Regardless of how you do the math:
Choosing a longer-term loan is sensible in many situations.
One common reason to choose a longer-term loan is to consolidate debts (debt consolidation loans). If you have too many short-term debts (especially high-interest debts like credit card debt), a long-term personal loan may help you get them under control. In theory, it works like this:
Another reason to make a personal loan long-term is to pay for a large project or any kind of high-ticket item. Some smart ways to use long-term loans include those which provide some form of long-term value:
Other reasons include one-off or unexpected expenses such as:
High interest rates are undoubtedly the largest disadvantage of long-term personal loans. You simply pay more for them at the end of the day.
In addition, the credit requirements are normally much higher. If you have bad credit or lack credit history, you may not qualify for (reasonable) long-term loans.
There are also fewer long-term personal loan products available. For expenses like cars and homes, you can take auto loans or mortgages, which are comparable to long-term personal loans but collateralize the item you are buying.
Also, there are dreaded fees in many cases. Some lenders feel incentivized to offer long-term loans simply because they make so much more money in interest, even if they have to wait for it.
But to protect their profits, they also incentivize you to stick to the repayment schedule through prepayment penalties/ early repayment fees.
So even if you want to shake off the loan early, you may have to cough up a comparable amount of money, but immediately instead of having it spread out over the remainder of the term.
Opting to use a long-term personal loan is a perfectly viable choice in many situations.
Getting the most out of one simply requires you to take a similar kind of precaution that you would with any other loan. Compare your options, consider your current creditworthiness, and determine whether you can fit the loan repayments into your budget.
The best long-term personal loans offer the best interest rates and terms that you can personally qualify for. So, taking the time to consider your options is the best way to find a long-term loan that pays off.
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