Long-Term Personal Loans: Are They Right For You?

If you're aiming to upgrade your kitchen or kick-start a business venture, long-term personal loans can help make those dreams a reality. They offer lower monthly payments than short-term loan options, making big expenses more manageable. However, it's crucial to be cautious. Despite their advantages, longer loan terms often mean higher interest rates.

Before committing to a long-term personal loan, you'll want to determine if it fits your needs and understand how to navigate the application process.

What Are Long-Term Personal Loans And How Do They Work?

A long-term personal loan is an installment loan that you pay back over 72 months or more. Long-term personal loans are typically unsecured, meaning there's no collateral. Because no asset is securing the loan, borrowers are seen as riskier. Lenders will closely check your credit score and debt-to-income ratio before approving you for this type of loan.

Personal loans with shorter terms, typically lasting from one to three years, usually have higher monthly payments but lower interest rates. Although these loans end up costing less overall due to the lower interest rates, you'll need to make sure your budget can handle the larger monthly payments.

Long-term personal loans are used for various reasons, like emergencies or big home improvement projects. These loans are often larger, ranging between $50,000 and $100,000 per loan.

Where Can You Get A Personal Loan With A Long Term?

This type of loan is typically available through credit unions, banks, and online lenders. It's wise to research each lending option to determine which best suits your needs. 

• Credit unions: Credit unions often have flexible loan terms, sometimes extending up to 15 years. You typically need to be a member to borrow from a credit union. Opting for a credit union can be a good choice if you have fair or poor credit.
• Banks: With this option, you can expect loan terms of up to 7 years. Requiring borrowers to be existing customers is a potential pitfall. While not all banks have this stipulation, you'll need to confirm your eligibility to borrow with your bank of choice.
• Online lenders: Online lenders are popular because they offer convenience. If your credit isn't ideal and you're not interested in a credit union, online lenders are another option worth exploring.

When Should You Consider A Long-Term Personal Loan?

A short-term personal loan might seem like the obvious choice at first, but a long-term personal loan could be a better option depending on your financial situation. A long-term personal loan is worth considering if you need smaller monthly payments, more time to repay, or if you're borrowing a large amount of money.

You Need A Lower Monthly Payment

When you pay back $50,000 over 72 months instead of 24, your monthly payments are much lower. This is one big reason why borrowers opt for long-term personal loans. If your budget is tight and you face an emergency, these loans provide a reasonable way to manage your debt without resorting to riskier options like payday loans.

While it's important to note that lower monthly payments don't mean you pay less overall, they do offer those with tighter budgets the power to manage their essential expenses and cash flow more effectively, providing a sense of control over their financial situation.

You Want To Borrow A Larger Amount

Sometimes, covering large expenses upfront isn’t possible, whether they’re planned or unexpected. In these cases, a long-term personal loan can be a helpful solution. 

Consider a long-term personal loan for expenses such as:

• Debt consolidation
• Large medical bills
• Home improvements
• Emergency expenses
• Moving expenses

You Need A Longer Repayment Term

If you can’t come up with the money quickly, a longer loan term gives you more time to arrange your finances and pay back the loan at a slower pace. This is similar to needing a lower monthly payment.

The Pros And Cons Of Long-Term Personal Loans

As with any financial decision, you should weigh the pros and cons of the loan type you’re considering. Long-term personal loans may not fit your specific needs every time, so it’s important to research your options.

How To Apply For A Long-Term Personal Loan In 5 Steps

While each lender has its own application process, here are five steps you can follow to secure a long-term loan.

1. Decide On A Loan Amount And A Loan Term

To start your loan application, determine how much money you need. It's wise not to borrow more than necessary to avoid paying extra interest charges. Also, consider the loan term carefully. Even a 1-year difference in length can impact how much you'll ultimately pay back.

Keep in mind that different loan lengths will have varying interest rates and fees.

2. Compare Lenders And Check Long-Term Personal Loan Rates

Research different lenders and their long-term personal loan offerings. List three potential lenders and contact them to inquire about their rates, terms, and fees. Feel free to ask questions to ensure you understand all the details before making a decision.

3. Check Your Credit

A good credit score improves your chances of getting better loan terms, like lower interest rates. If your score is low, you may want to work on improving your credit before applying for a loan. This might mean paying off debts, fixing errors on your report, and making payments on time.

4. Get Prequalified

Many lenders offer prequalification, which allows you to see the loan terms you're likely to qualify for without impacting your credit score with a hard inquiry. Take advantage of this opportunity to compare offers from different lenders and choose the most favorable one.

5. Complete The Application Process

Once you've chosen a lender, it's time to fill out the application. The lender will ask for your personal and financial details, such as proof of income. During this process, the lender will conduct a hard inquiry on your credit, which may cause your credit score to drop slightly.

Alternatives To Long-Term Personal Loans

Long-term personal loans aren't your only option when you need money. Here are a few alternatives worth considering.

Home Equity Line Of Credit (HELOC)

A HELOC allows you to borrow against your home's equity. However, you need to own a home and have equity in it. HELOCs usually have variable interest rates, meaning your rate can change during repayment. Since your home secures the loan, you risk losing your home if you can't repay the loan.

Credit Card

Credit cards can be helpful financial tools if used wisely. However, high interest rates, annual fees, and potential damage to your credit score are factors to consider when using them as an alternative to a long-term personal loan.

Credit cards are ideal when you need short-term access to funds and flexible repayment options.

Cash-Out Refinance

A cash-out refinance lets you convert your home equity into cash by taking on a larger mortgage. This is a good option if you've built up a lot of equity in your home.

The main benefit is that you can use the money for anything. 

But, since it's a mortgage product, closing costs are involved. Be sure to review these costs carefully, as they can make cash-out refinancing less appealing than other financing options.

The Bottom Line: Personal Loans With A Long Term Have Some Benefits

Long-term personal loans are helpful if you want lower monthly payments or need a lot of money. Just make sure you know how much you need and can handle the payments. Be prepared for the extra costs that come with longer repayment periods. Consider all the pros and cons and explore other potential options before deciding.

Looking for a long-term personal loan? Download the Rocket Money℠ app to check if the monthly payments fit your budget.