3 Things you should know about taking out a long-term loan

/ 28 diciembre 2018
Dinero y euros (Foto Ministerio Empleo)

Dinero y euros (Foto Ministerio Empleo)

People take loans for a variety of reasons. Some take loans to kick-start their businesses while others use the money to cater to unprecedented occurrences such as emergency house repairs or vehicle breakdowns. There are essentially two loan types: long-term and short-term loans.

Long term loans normally mature after 3-10 years. However, some bank loans can extend this period to 20 years or more, depending on the distinct purpose of those loans. Home mortgages and business capital improvement loans are examples of long-term loans.

Short term loans, on the other hand, are taken over brief time periods ranging between 3 – 18 months. These loans are used to cover an assortment of emergency expenditures and can be repaid in monthly instalments.

Taking a loan is great, so long as you’ll pay back the money plus interest within the stipulated period. You can receive flexible short-term loans at Loanable by following a quick, straightforward application process. Are you thinking about taking a long-term loan?

Here are 3 things you ought to know about taking out a long-term loan:

  • Offers lower interest rates

Long term loans are often recommended for individuals who are willing to repay small, manageable sums every month. These loans usually offer reduced interest rates compared to intermediate and short-term loans. However, there’s a catch: you’re required to have a steady source of income over a lengthier period (10-20 years) to facilitate loan repayment as stipulated by your lender. Home mortgages and similar long-term loans offer interest that ranges between 4% and 5%. This is a far cry from the exorbitant interest rates charged by a variety of credit card companies and short-term loan lenders. Their rates can stretch from 10% to 25%. It’s important to have this in mind before taking out any long-term loan.

  • Restricts your cash flow

Taking up a long-term loan also comes with a few challenges. The main drawback is restricting your net cash flow. A significant chunk of your monthly income will be spent on debt repayment, meaning that you’ll barely have enough money left aside to put into your savings account. It’s always important to have sufficient financial liquidity in case you’re faced with unexpected emergencies that need your immediate attention. Because of their extensive maturity periods, long term loans will limit you cash flow and potentially prevent you from making further life developments.

  • Poses bigger collateral risks

To reduce the risk of loss, most lenders request for a worthwhile collateral before issuing a long-term loan. If you intend to build property using the loan, your bank could take up the property as collateral. This exposes you to a huge collateral risk – the bank could lawfully repossess your property once you’re unable to repay the entire loan. If you’re unwilling to take such a huge responsibility, avoid taking a long-term loan altogether. However, every venture involves a fair deal of risk. Before taking up any loan, come up with a sufficient repayment strategy and have a contingency plan in case things backfire and you’re entangled in a financial mess.

These three facts about long-term loans will help you make a better financial decision when push comes to shove.

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