Long-term loans can be helpful in accommodating the cost of big-ticket purchases. You can spread the loan cost across a period and repay it through fixed monthly instalments. But long-term loans require discipline, since they can last for more than 5 years. Here are 4 FAQs to help you understand long-term loans.
Long-term loans are personal loans that you can borrow over a long period. These loans allow you to borrow a large sum of money, usually to finance big-ticket expenses. With a long-term loan, you can spread the cost across a longer period, over fixed monthly instalments. Long-term loans help in making repayments more manageable.
Read on to find out how long-term loans work and some merits and demerits associated with this form of credit.
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Norwich Trust
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10 years
4.8/5
Representative APR
31.90%
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Representative Example: £12,000 over 66 months, 31.9% APR fixed. Monthly payment £358.22 Annual interest rate 28.01% fixed. Interest payable £11,642.52. Total repayable £23,642.52.
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Norwich Trust
Loan Amount
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Representative APR
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Representative Example: £12,000 over 66 months, 31.9% APR fixed. Monthly payment £358.22 Annual interest rate 28.01% fixed. Interest payable £11,642.52. Total repayable £23,642.52.
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Evolution Money Loans
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4.5/5
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28.96%
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Representative Example: Loan Amount: £20950.00, Loan Term: 85 Months, Interest Rate: 23.00% PA Variable. Monthly Repayments: £537.44. Total Amount Repayable: £45,682.15. This example includes a Product Fee of £2,095.00 (10% of the loan amount) and a Lending Fee of £714.00
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Representative Example: Loan Amount: £20950.00, Loan Term: 85 Months, Interest Rate: 23.00% PA Variable. Monthly Repayments: £537.44. Total Amount Repayable: £45,682.15. This example includes a Product Fee of £2,095.00 (10% of the loan amount) and a Lending Fee of £714.00
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Representative Example: Borrowing £3000 over 36 months with a representative APR of 39.9% (variable),the amount payable would be £134.21 a month,with a total cost of credit of £1831.56 and a total amount payable of £4831.56.
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1Plus1 Guarantor Loans
Loan Amount
£1000 -
£10000
Loan Term
1 -
5 years
Representative APR
39.90%
Minimum Age
18 years
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Not mentioned
Representative Example: Borrowing £3000 over 36 months with a representative APR of 39.9% (variable),the amount payable would be £134.21 a month,with a total cost of credit of £1831.56 and a total amount payable of £4831.56.
What are long-term loans?
- Fundamentally, a personal loan that can be paid off over a term of 5 years or above can be categorized as a long-term loan. These loans are often referred to as 10-year loans. This option helps you spread the repayment amount across a longer-term, effectively reducing your monthly instalment, making repayments more affordable.
- Long-term loans can ease your financial burden if you’re financing a big-ticket purchase or want to consolidate multiple debts. Do keep in mind that your monthly instalments are inclusive of interest, ergo, the lender will charge interest throughout the loan’s tenure. So, the longer the loan term, the more you end up paying towards interest. So, long-term loans may be more expensive overall. A 7-year loan, per se, will cost you more in interest than a 4-year loan.
How do long-term loans work?
Where you can settle a typical personal loan within a term of 1 – 5 years, long-term loans take much longer to pay-off. To qualify for competitive rates for long-term loans, you need a decent credit rating, income and employment history. But think about how much you’ll end up paying in interest. Is this an amount you can afford?
Even if you snag a great offer with a low-interest rate, try to settle the loan as soon as possible. But do check if your loan agreement allows early settlement, or what charge will the lender impose on early repayment.
Lenders commonly base their decision per the following factors:
- The loan amount you choose to borrow
- The term of your loan
- Your income
- Your expenses
- Debt-to-income ratio
- Your credit history and credit score
As long as you satisfy a lender’s requirement, you’ll get competitive terms, ergo, lower interest rates. If you want to reap long-term benefits from your offer, don’t just compare interest rates, try comparing the APRs. Annual Percentage Rate or APR is the overall cost of your loan. APR includes all additional charges imposed, loan origination fee or brokerage fee, per se, when you take out a loan. A long-term loan offer with a relatively lower interest may have high APR. So, consider these extrinsic factors before concluding your decision.
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The key to responsible borrowing is avoiding defaults in repayment. Lenders report all payments to credit bureaus. So, a missed payment could be detrimental to your credit score. Assessing your affordability before applying for the loan will also help you make an informed decision.
Pros and cons of long-term loans
There are merits and demerits associated with all forms of credit. Here are some pros and cons of taking out a long-term loan:
Pros
- Borrow a large sum of money: You can borrow a significantly larger sum of money with long-term loans. So if you were running out of ways to finance your home improvement project or a new car, long-term loans might get you the funds.
- Competitive interest rates: If you apply for a long-term loan with a decent credit report, you may qualify for competitive interest rates. Do keep in mind that you’ll end up paying more in interest with a longer loan term.
- Affordable instalments: Since long-term loans spread across a longer duration, you’ve to pay smaller monthly instalments. Thus, these loans make repayments more bearable.
- Repayment flexibility: Lenders generally don’t have any hard and fast rules concerning the repayment period. So as a borrower, you’ll have the liberty to choose a repayment period that you find convenient.
Cons
- Long repayment period: It’s not easy for everybody to keep up with repayments for as long as 7-10 years. Repaying a long-term loan can be tedious. Such a commitment requires your discipline and dedication. So, ensure that you’re prepared to take up such a responsibility.
- Might pose a threat to your collateral: Did you take out a long-term loan using collateral security? A default may put your property at risk. Make a repayment plan beforehand and adhere to it religiously.
- Early repayment charges: Some lenders impose a tariff on the early settlement of long-term loans. Attentively read the terms of the contract to know if your lender will levy an early repayment fee.
Do you need a guarantor for long-term loans?
- A guarantor is a close friend or family member who co-signs the loan agreement with you. By signing the contract, they agree to partake in the loan’s obligations with you. Now if you default with your repayments, the onus will fall on your guarantor. The lender will summon your guarantor to make repayments on your behalf.
- Whether or not you need a guarantor to get a long-term loan, will depend upon your credit rating and income stability. These attributes help the lender assess your creditworthiness and affordability. If you don’t have a stellar credit history, the lender may ask you to bring a guarantor, to reduce the risk of loss. Your guarantor, however, should be someone with good credit history.
- Furthermore, a guarantor can help you get lower interest rates on long-term loans. In case you’re borrowing a long-term loan to create credit footprints, having a guarantor by your side may help your get better offers.
Conclusion
A long-term loan requires sheer commitment and dedication. Knowing what you’re getting into is crucial before signing the agreement. Be it debt consolidation or financing a renovation project, you can use a long-term loan at your discretion. But it’s imperative that you pre-plan your repayments to avoid the possibility of a default. As long as you use credit responsibly, it’ll contribute towards boosting your credit rating.
