The Complete Guide on Long Term Personal Loans

by Emma Anderson Short Term Loan Solutions with Loan

You must have heard about personal loans, unsecured loans that require you to borrow money to fund big purchases without putting in collateral. A couple of lenders offer long term personal loans as well. There are two types of personal loans: short term and long term; the former is called unsecured, and the latter is called secured personal loans.

These loans have been designed to help you fund major expenses around personal and business needs. There are three basic features of long term unsecured loans: higher borrowing amount, lower interest rate, and collateral submission. If you make a default, you will lose the security. However, there are a lot of things you need to know about these loans.

What are the ideal circumstances to apply for these loans?

Because these loans allow you to borrow a large amount of money, it does not mean that you will rush to them to fund a big purchase. Do not forget that these loans are secured loans. In case you fail to make payments, you will lose your valuable asset and affect your credit score into the bargain. Here are the circumstances ideal for these loans:

· Home refurbishment

If you are looking to renovate your house that requires a lot of funding, for instance, replacing the rooftop, you can take out these loans. Your house equity can serve as a purpose of collateral. If you are looking to buy a house, you can use these loans as well.

However, the market price of the house should fit in the borrowing range. If you are using these loans for this purpose, your house will be the collateral. In that case, these loans are called mortgage loans.

· Buying a car

You can use these loans to buy a car as well. However, these loans are ideal for buying expensive cars because, otherwise, short-term loans can be beneficial.

Your car will serve as collateral. All terms and conditions will be the same as auto loans, but interest rates will likely be lower.

· Business funding

If you need money to fund a big business project, these loans are a perfect choice. However, if you want to start your own business, you can use these loans. The best thing is that you will avail yourself of lower interest rates.

However, sometimes you may get your funding needs fulfilled with small loans. For instance, if you are a single mother and want to start a home-based business, you can take out loans for unemployed single mothers.

· Education

Depending on the type, of course, you want to pursue, the loan term is decided. If you are going to pursue a degree programme or course that requires a lot of funding, you can take out long term personal loans.

These loans will help you get money at lower interest rates. Payments over a period of time will make it further easier to manage the debt.

What are the pros and cons of long term personal loans?

Long term loans come with several benefits and drawbacks. Here are the pros and cons of these loans:

· These loans boost credit score

One of the greatest benefits of using these loans is that they can boost your credit score. Since you will pay down the debt over a long period of time, it will have a direct impact on your credit file. When you keep stuck to your repayment plan, it shows your loyalty despite financial ups and downs.

Lenders assume that financial situations cannot be the same throughout the loan term, and despite that, you stick to your repayment plan, which shows your financial loyalty. This is why long term loans boost credit rating contrary to short term loans, paid in a lump sum.

· Low-interest rates

Long term personal loans carry lower interest rates than unsecured loans. This is because they are secured, which reduces the lender's risk.

If you make a default, the security will be cashed out to get money back. However, it would be best if you still try to pay down the debt on time. Otherwise, you will badly ding your credit score.

· High debt-to-income ratio

Since long term personal loans involve a large amount of money, it means you are increasing your debt. When you calculate the debt-to-income ratio, it will be much higher.

It will not affect you until you need to borrow another loan to fund unforeseen expenses. For instance, when you take out a new loan, a lender will check your credit score and a high debt-to-income ratio accounts for a poor credit rating.

This high ratio will make it difficult for you to borrow money at lower interest rates. The same thing applies when you are to apply for a new credit card.

· Total interest payment

Long term personal loans are known to be very affordable because they carry lower interest rates. Still, when it comes to assessing affordability, you should check the total interest paid. Although these loans carry lower interest rates compared to short term personal loans, you will end up paying a lot of money as interest. Here is an example:

	Short term personal loans	Long term personal loans
Loan amount	£15,000	£15,000
Interest rate	11%	7%
Tenure	3 years	7 years
Payment every month	£487.41	£224.82
Total amount to be paid	£17,546.61	£18,884.61
Total interest	£2,546.61	£3,884.61

Now you can see that short term personal loans are more affordable than long term personal loans in terms of total interest. However, the size of monthly instalments will be bigger.

The bottom line

Long term personal loans are deemed to be more affordable than short term personal loans. However, there are still various things you need to figure out whether these loans are affordable for you.

You cannot make a decision based on the interest rates and the size of monthly instalments. You will have to suss out if it impacts your ability to finance down the line. Everything counts at the time of borrowing money.