Need a little longer to repay? Here’s what you need to know about long-term personal loans.
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 such as a car, boat, complicated surgery or a huge 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 may be lower but you will be paying more interest overall. This can be good for your short term finances as it will lift stress from your cash flow, but you’ll ultimately be in debt for longer.
How does a long-term personal loan work?
A personal loan with a longer repayment term works similarly to personal loans with shorter repayment terms. You’ll just have lower monthly payments, which you can usually set on autopay so you don’t miss a due date.
Borrowers may have a choice between fixed- and variable- rates with their long-term personal loan. Fixed-rate loans have steady repayment amounts while variable-rate loans can have fluctuating repayment amounts.
While these loans are usually taken out by people who are borrowing more, usually in upwards of $10,000, they can also be taken out by people borrowing a smaller amount who are unable to afford higher repayments.
Compare personal loans with terms as long as five years
Is a long-term loan better than one that’s repaid quickly?
Not necessarily. Ultimately, a shorter loan term is generally better because you’ll pay less in interest. Your repayments may be higher with a shorter repayment period, but you’ll pay more interest overall with a long-term loan.
For example, a $20,000 loan repaid over four years at a 12.5% APR will add up to $532 in payments each month and $5,517 in interest over the course of the loan. If that term was extended to seven years, you would be repaying $358 per month, but the interest you pay would just about double to $10,108.
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 meet them. - Is the loan secured or unsecured?
Secured loans are ones that 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. - How much is the loan amount?
The amount you can borrow depends on various factors such as your credit score, what you need the funds for, your ability to provide suitable collateral, your annual earnings and your monthly expenses. - 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 payments or decide you want to pay your loan off altogether before the original payoff date. Find out if you can do so without penalty. - What are the other fees and charges on the loan?
Other fees and charges apply. These fees should always be clearly listed on your loan agreement.
Pros and cons to consider
Pros
- Lower repayments. A loan with a longer term means lower repayments, giving you more flexibility with your finances during the loan term.
- 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.
Cons
- You’ll likely pay more in interest. A long-term loan attracts more interest because the length of the loan term is that much longer.
- You’ll be in debt longer. A lengthier repayment period keeps that debt on your budget until you completely pay it off.
Three pitfalls 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 all the fine print 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.
- Tendency to splurge. Long-term personal loans normally set a minimum loan amount that may leave you with a larger chunk of change than you needed. If you’re not responsible with that extra cash, you can be tempted to spend it elsewhere.
Savings with a shorter loan term
| 4-year loan | 7-year loan | |
|---|---|---|
| Interest rate | 12.99% | 12.99% |
| Loan amount | $40,000 | $40,000 |
| Total interest | $11,499 | $21,107 |
| Difference | + $9,608 more in interest |
How to apply for a long-term personal loan
Applying for a long-term personal loan is rather straightforward and you should compare your options before getting to this step. As part of the application process, most lenders will want to take a look at a few things including:
- Credit history
- Identification
- Proof of residence
- 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 in question.
