A long-term personal loan is a loan that has a repayment period that’s typically more than three years. Loan terms that are this lengthy will often be used for big purchases like a car, boat, home renovations or an extravagant wedding.
Something to be careful of when it comes to long-term personal loans are your repayments. Since you’re extending the loan for as long as you can, your ongoing repayments will likely be lower each month, but you will be paying more interest overall — which makes the loan more expensive. While lower repayments can be easier to manage month to month, you’ll ultimately be in debt longer.
You’ll have have lower monthly repayments, which you can usually set on autopay so you don’t miss a due date.
The cost of your loan will be more since you’re taking longer to pay it back.
While long-term loans are usually taken out by people who are borrowing a larger amount of money, usually upwards of $10,000, they can also be taken out by people borrowing a smaller amount who are unable to afford higher monthly repayments.
You will usually be able to choose from the following long-term loan interest rate options:
Fixed-rate. Your rate will be determined when you sign your loan contract and will remain the same throughout your loan term. Your monthly repayments will always be the same.
Variable-rate. Your rate will be determined by the state of the market and will likely fluctuate throughout the loan term, meaning your monthly repayments could change from month to month.
Compare personal loans with terms as long as ten years
Is a long-term loan better than a short-term loan?
Not necessarily. Ultimately, a shorter loan term is generally better because you’ll pay less in interest. Your repayments may be higher each month with a shorter repayment period, but your loan will be cheaper.
A long-term loan will mean your monthly repayments will be less, however the total cost of the loan will be more since your loan term is longer.
For example, a $20,000 loan repaid over four years at a 12.5% APR will add up to $532 in repayments each month and $5,517 in interest over the course of the loan. If that term was extended to seven years, you would be paying $358 per month in repayments, but the interest you pay would almost double to $10,108.
This is why it’s important to budget in your repayments and choose the shortest loan term possible.
Five important questions to ask when comparing long-term personal loans
What is the interest rate of the loan? This largely defines what your repayments will be over the course of the loan. Take this into account and calculate what your repayments will be to determine if you’ll be able to make them. You will also likely have the option to choose between fixed-rate and variable-rate interest rates.
Is the loan secured or unsecured? Secured loans require you to provide some kind of collateral and will typically have lower interest rates in comparison to unsecured loans. If you’re buying a car, the car will usually serve as collateral. Other forms of collateral include equity on your home, expensive jewelry or antiques.
Can you repay the loan early? Repayment flexibility may be important to you even if you want a long-term loan. You may come into some cash and want to make extra repayments or decide you want to pay your loan off altogether before the original payoff date. Find out if you can do this without incurring extra fees.
What are the other fees and charges on the loan? Other fees and charges will likely apply. These fees should always be clearly listed on your loan agreement. If you’re unsure of any charges, contact the lender directly.
Pros and cons to consider
Lower repayments. A loan with a longer term means lower monthly repayments, giving you more flexibility with your finances during the term of the loan.
You could hack the loan. By choosing a longer loan term and making additional repayments, you could pay your loan back sooner while taking advantage of the lower repayments.
You could get financing for huge expenses. Long-term personal loans allow you to finance more expensive purchases such as cars or boats.
You’ll likely pay more in interest. A long-term loan attracts more interest because the length of the loan term is much longer. This means your loan is more expensive overall.
You’ll be in debt longer. A lengthier repayment period keeps you in debt until you completely pay it off.
Three things to watch out for
Excessive debt. While taking out a long-term personal loan might seem like a good idea, it might lead to debt that may be difficult to repay. Try to make a repayment plan ahead of time and account for unexpected expenses in your budget.
Fees and charges. Make sure you go through the fine print on your contract and find out exactly what you have to pay in terms of fees and charges. These can come in the form of application fees, insurance costs, origination fees, early repayment fees, settlement charges and late charges, among many others.
Tendency to splurge. Long-term personal loans normally set a minimum loan amount that may leave you taking out more money than you actually need. If you’re not responsible with that extra cash, you can be tempted to spend it elsewhere. Remember, only borrow as much as you need.
Savings with a shorter loan term
+ $9,608 more in interest
How to apply for a long-term personal loan
Applying for a long-term personal loan is usually straightforward. Before you apply for a loan, be sure to compare your options and find the most suitable lender for your financial needs. As part of the application process, most lenders will want to take a look at a few things including:
Your credit history
Proof of residency
Your employment status and history
Proof of income
If you’re applying for a secured loan, you’ll have to provide documents to prove ownership of the collateral you’re providing.
Some lenders provide preapproval within minutes, however it usually takes a few days to a few weeks to move through the loan process and actually receive your funds. Some lenders can have your funds to you by the next business day, while others may take a couple of weeks.
First, you’ll likely be subject to a late payment fee. You might be able to get the penalty waived once if you’re in good standing and it was an honest mistake. However, multiple missed payments can result in defaulting on your loan. Making late repayments can negatively affect your credit score.
If you default on your loan, your credit score will be negatively affected and the default will be listed on your credit report. In the future, you could have trouble securing financing. If you secured your loan with an asset, such as your car or home equity, your property could be seized by the lender in order to recoup their losses.
You won’t go to jail for not being able to pay back your debts. However, you should know that your credit report will have a black mark on it that will be tough to scrub out. This will seriously affect your borrowing power in the future. If you had a secured loan, your collateral could be taken for the lender to recoup their losses.
Kyle Morgan is a producer for finder.com who has worked for the USA Today network and Relix magazine, among other publications. He can be found writing about everything from the latest car loan stats to tips on saving money when traveling overseas. He lives in Asbury Park, where he loves exploring new places and sipping on hoppy beer. Oh, and he doesn't discriminate against buffalo wings — grilled or fried are just fine.
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