What Is a Long-Term Personal Loan?
The term “long-term personal loan” refers to the length of a loan, rather than a specific type of loan. While there is no hard and fast rule for what makes a loan “long-term,” personal loans with terms of 5 years or more are usually considered long-term. Long-term personal loans might be worthwhile if you want a smaller monthly payment as long as you don’t mind paying more for them.
Pros and Cons of Long-Term Personal Loans
Just like all financial products, long-term personal loans have benefits and drawbacks, which we’ll go over below.
Pros of Long-Term Personal Loans
- Lower monthly payments: Compared to short-term personal loans, long-term personal loans offer lower monthly payments.
- No collateral required: Most long-term personal loans are unsecured, meaning you don’t need to back them to collateral like your house, car, or savings account.
- Fixed rates: Since long-term personal loans come with fixed interest rates, you’ll be able to budget for your payments in advance.
Cons of Long-Term Personal Loans
- Fewer loan options: It might be difficult to find lenders that offer long-term personal loans as short-term financing tends to be more common.
- High interest rates: Typically, long-term personal loans feature higher interest rates than short-term loans.
- Potential prepayment penalties: Some lenders offer prepayment penalties, which can be problematic if you wish to pay off your long-term loan early.
Types of Long-Term Personal Loans and Their Uses
The various uses for long-term personal loans include:
- Debt Consolidation: A long-term debt consolidation loan combines several high-interest debts, like credit card debts, payday loans, and title loans into one, manageable personal loan. With a debt consolidation loan, you can enjoy a lower rate, fixed monthly payments, and less due dates to remember.
- Emergency Expenses: Unfortunately, emergency expenses are bound to pop up every now and then. A long-term personal loan can help you cover the costs of a natural disaster, major car repair, unexpected medical bill, appliance replacement, and other surprise expenses. You can receive the cash you need right away and repay it via fixed, monthly payments over a period of 5 years or more.
- Home Renovations: You may take out a long-term home improvement loan to finance home renovations. Whether your goal is to remodel your kitchen, finish your basement, or install a swimming pool, it can come in handy. Since they’re unsecured, you don’t have to put your home on the line like you would with a home equity loan or HELOC.
- Major Events or Purchases: If you have to pay for an expensive event or purchase like a wedding, move, or even a dream vacation, a long-term personal can make your life easier, especially if you don’t have the cash to cover all of it. You’ll be able to fund important occasions or items without the financial stress.
How to Get a Long-Term Personal Loan
If you’re interested in a long-term personal loan, follow these steps.
Step One: Check Your Credit Score
First and foremost, find out where you stand credit wise. You can check your credit score through a credit scoring website, credit card provider, or nonprofit credit counselor. Once you know what it is, you’ll have a better idea of what types of long-term personal loans are within reach.
Step Two: Determine How Much You Need to Borrow
Ask yourself what you need the long-term loan for. Then, decide how much money you need to borrow to meet your goal. While it may be tempting to overborrow, doing so can be very expensive and steer you into a cycle of debt.
Step Three: Shop Around for the Best Terms and Rates
Not all long-term personal loans are created equal. That’s why it’s your job to explore the various options at your disposal. When you do so, compare rates, terms, fees, and perks. Don’t forget to read lender reviews.
Step Four: Select a Lender
Now it’s time to make a decision. Choose a lender with a long-term personal loan offer that is ideal for your current and future budget and circumstances.
Step Five: Complete the Loan Application
Most lenders will allow you to apply for a long-term personal loan online, from the comfort of your own home or office. Be prepared to share basic personal and financial information. You’ll also need to submit documents like your government-issued ID, pay stubs, tax forms, and bank statements.
Step Six: Receive Your Funds
Upon approval, the lender will distribute your money, usually via direct deposit, check, or prepaid card. Depending on the lender, you may receive them the same day you get approved, within 24 hours, or in a few business days.
Alternatives to Long-Term Personal Loans
Not sure if a long-term personal loan is right for you? Consider these alternative options.
Home Equity Loans
Home equity loans allow you to borrow against the equity in your house, which is the current market value of your property minus what you owe on your mortgage. In general, you need anywhere between 15% and 20% in equity to qualify.
Since terms may last between five and 30 years, you can receive a longer term than you’d be able to with a personal loan lender. Just keep in mind that if you default on a home equity loan, your home may go into foreclosure.
A credit card is a revolving line of credit. This means you can borrow as much or as little as you’d like, up to a set credit limit, which is usually based on your credit score. As long as you make the minimum payment each month, you can take your time paying back your balance. Compared to long-term personal loans, credit cards are far more flexible. But the downside is you may not have access to as much funding as you would with a long-term personal loan.
With a cash-out refinance, you refinance your primary mortgage for more than you currently owe on it. Then, you pocket the difference in cash. If you get approved for lower rates than you’re paying on your mortgage, a cash-out refinance might be a good option. Note that you may have to pay high closing costs so it’s important to do the math and make sure this is a cost-effective choice.
If you have a 401(k) retirement account, you can borrow up to 50% of the vested balance or $50,000, whichever is less. Since the interest will be paid back directly to your account, you’ll essentially pay interest to yourself instead of a bank. To avoid an early withdrawal penalty of 10%, you must be at least 59.5 years old or meet the 55 IRS guidelines. The repayment term for a 401(k) loan caps out at five years.
Borrowing from Friends and/or Family
There are a number of perks of borrowing money from loved ones. Typically, the approval process is easier and you can lock in a much lower interest rate than you would with a bank, credit union, or online lender. Also, if you face financial hardship, a friend or family member will likely be understanding and willing to work with you. But if you don't repay your loan according to the terms of your agreement, you may strain an important relationship.
Meet Your Long-Term Financial Goals
If you want to add value to your home through a major home improvement project, consolidate significant amounts of credit card debt, pay for a medical emergency, or anything in between, a long-term personal loan may be the ultimate solution. Just be prepared to spend more than you would with a short-term financing option.