A long-term loan is one that is repaid over a period of more than one year. They could be secured and unsecured, depending on the borrowing amount. Normally, loans that last for up to five years are unsecured, and those that last for beyond five years are called secured loans. Long term loans could serve a variety of purposes, for example:

• You can purchase a car or an electronic appliance.
• You can use these loans to carry out home remodelling projects.
• You can consolidate your current outstanding debts.
• You can use these loans to buy a house, which is called a mortgage.
• You want to use them for weddings or other big expenses.

In this day and age, lenders are more flexible than ever when it comes to approbating a loan application. Yet, the approval criteria for long-term loans is not a cinch. While you can easily qualify from direct lenders for bad credit loans with no guarantor, lenders might not be able to approve your long-term loan application simply based on your income sources.

The reason why long-term loans involve stricter criteria is that they are settled over a long period of time. Your income sources cannot predict your future repaying capacity. What if you lose your job? What if you take more than expected time to land a new job? Lenders cannot make their lending decisions based on their current income sources. They will have to take other factors into account, too.

How do long term loans work?

Long-term loans could be personal loans or secured loans. Both types of loans are repaid over an extended period of time. Long-term loans are considered more manageable than short-term loans because the cost is spread over a period of years. Home improvement and weddings could be very expensive. They become manageable if you take out a loan for them.

Whether it is a personal loan or a secured loan, you will be required to pay down a fixed sum of money every month throughout the loan term. As these loans are amortised, monthly instalment will go towards both the principal and the interest. With each payment, you will notice a reduction in the size of the loan amount.

Once you have settled the whole debt, the account will be closed. Unlike recurring credit, you will have to apply for a long-term loan again if you need money. The consequences of non-payments are more or less similar to that of defaulted short-term loans.

• Your credit score will go down. However, you can prevent your score from being impaired by clearing your dues within 30 days from the due date.
• Late payment fees and interest charges are ineluctable. Whether or not late payment is recorded on your credit file, you cannot stop accumulating your debt.

Bear in mind that you will not be able to qualify for a loan at low interest rates down the line if your credit rating is affected due to non-payment and late payments.

Do long term loans carry high interest rates?

Compared to short-term loans, interest rates for long term loans are lower. Lenders find short-term loans riskier, especially if your credit rating is bad. As they are paid off in full on the due date, lenders often doubt your repaying capacity as now you are to pay interest on top of the principal, which you were not able to arrange from your pocket before putting in a loan application.

When you compare the annual percentage rate (APR) and interest rates between short-term and long-term loans, you will find that the latter carries lower interest rates. However, long term loans with lower interest rates do not have to be inexpensive. Do not forget to take the repayment term into account.

As long-term loans are repaid over an extended period of time, the amount of interest will increase in total. The longer the duration, the more expensive the debt will become. You should always try to choose a long term loan with a shorter duration. The monthly instalment would certainly be big, but you can prevent yourself from paying a lot of interest.

A bad credit rating will add the burden of interest payments

Long term loans are difficult to qualify for if your credit rating is not up to snuff. Most of the lenders expect you to have a good credit rating. However, if your credit score is not so stellar, a few lenders might lend you money, provided your financial situation is strong. Long term bad credit loans are quite expensive. They carry very high interest rates. You should be careful about your repaying capacity while using loan term loans with bad credit.

In order to improve your chances of being qualified for these loans at lower interest rates, you should try to make these efforts:

• Make sure your financial income is strong. It could offset the impact of a bad credit rating when lenders find that you have more than sufficient income to settle your dues.
• Avoid owing any type of debt. No outstanding small emergency loans should appear on your credit file when applying for long-term loans.
• Make sure that credit inquiries and missed payments are too old. Lenders are normally concerned about recent information rather than too old.

It is enjoined that you must improve your credit score. A good credit score will help you qualify for lower interest rates. You should always try to make efforts to do up your credit rating.

Benefits of long term loans

Here are the advantages of long term loans:

• One of the advantages of a long term loan is that you will pay it down in fixed monthly instalments. As the loan is to be settled over a period of time, monthly instalments will be lower. This is called spreading the cost of the loan. Unfortunately, you have no option to spread the cost in case of short term loans such as payday loans and bad credit emergency loans.
• Because every month, a fixed amount is paid down, long term loans are more affordable than short term loans. You can easily fit them into your budget without fearing falling behind on payments.

Drawbacks of long term loans

Here are the drawbacks of long term loans:

• Long term loans could be expensive even though they are relatively cheaper than short term loans. This is because interest accrues on the unpaid balance for the rest of the period. This increases the total interest amount.
• They could be risky because you cannot be certain about your repaying capacity in the future. What if you lose your job? What if you struggle to make payments? Of course, when you struggle to repay the debt, you will end up with rolling over the loan. It will not only damage your credit score, but it will also ruin your chances of getting a loan at affordable interest rates down the road.

The final word

Long term loans can help you meet all major expenses. Make sure that you have a good credit rating. In addition, assess your repaying capacity carefully. You should always try to use these loans only when you know you can repay them.