Most people think of a personal loan as a short-term funding method with terms typically ranging from two to seven years. Borrowers use these versatile loans to finance home renovations, pay for medical bills, or even consolidate credit card debt.
But did you know that long term personal loans exist too? Here is what you need to know about this type of loan, including when it might be the right option for you.
What is a long-term personal loan?
A long-term personal loan has repayment terms of at least five years. Many personal loan providers cap terms between five and seven years, but some lenders offer terms of up to 12 years.
Most long term loans have higher interest rates than short term loans. This is one of the main disadvantages of long term loans compared to short term loans. However, the main advantage of a long term loan is a lower monthly payment, which can make borrowers’ financial resources easier.
For example, let’s say you apply for a $ 20,000 personal loan and receive two offers: the first has a term of four years with an APR of 5% and a monthly payment of $ 461. The second option has an eight-year term, an APR of 10%, and a monthly payment of $ 303. This lower payment is more in line with your budget, so you go with the eight-year loan. Keep in mind that while you would have a lower monthly payment, you would also be paying more interest over the life of the loan.
Borrowers can still pay extra on the loan, but some lenders charge a prepayment penalty if the loan is prepaid.
When should you take out a long-term personal loan?
Long-term personal loans may be suitable for borrowers who need more flexibility in repaying their loans and prefer lower monthly payments.
If you have variable, seasonal, or commission-based income, you can opt for a lower minimum payment with the option to pay extra when you can afford it. If you can find a lender that doesn’t charge a prepayment penalty, you won’t owe any fees if you pay off the loan sooner than expected.
Where to get long term loans
Banks, credit unions, and online lenders often offer long-term personal loans. Here are our top picks.
Long-term loans from SoFi have a maximum term of seven years and are capped at $ 100,000. SoFi long term loan interest rates range from around 10% to 15%. Unlike other lenders, SoFi does not charge prepayment penalties, origination fees, or late fees. The minimum credit score requirement is 680.
Lightstream has the longest repayment terms among the providers on this list, with terms of up to 12 years. Borrowers must have a credit score of 660 or higher to be eligible. Highly qualified applicants can borrow up to $ 100,000. The interest rates for long term loans vary between 6% and 20%.
If you are looking for the longer term personal loan with the highest total loan amount, Lightstream may be the one for you.
Marcus has the shortest terms available compared to other lenders, with a six-year cap. The minimum required credit score is 660 and the APR caps at around 20%. Borrowers can subscribe up to $ 40,000. It takes around 24 hours to get approved, and between one and four days for the money to reach your bank account.
Borrowers who do not need an unusually long and large loan amount can stay with Marcus.
Long Term Loans For Bad Credit
If your credit score is below 660, you may find it more difficult to qualify for a long-term personal loan from a traditional lender.
Lenders like Upstart and Lending Club specialize in personal loans for consumers with bad credit. If you don’t meet the minimum credit score requirements of any of the three lenders listed in the section above, consider Upstart or Lending Club.
Pros and Cons of Long Term Loans
Long term loans have several advantages and disadvantages. Here’s what to know before applying for a long-term personal loan.
Benefits of long term loans
- Monthly payments are often lower than for short term personal loans.
- It is easier for a borrower to manage a long term loan repayment in addition to other bills and debts.
- You can still borrow large amounts with a long term loan.
Disadvantages of long term loans
- Interest rates are higher for long term loans, which increases the total interest paid.
- Applicants must have good credit.
- It can be more difficult to find a lender offering long term loans.
- You may be charged a prepayment penalty if you prepay the loan.
Long-term loan alternatives
Borrowers who are wary of long-term loans may explore one of the following options:
Home equity loans
Home equity loans borrow against the accumulated equity in your home. Your equity is the current market value of your home minus the remaining mortgage balance. You generally need to have between 15% and 20% of the equity in the home to qualify.
The terms last between five and 30 years, so you can benefit from a longer term than what a personal lender could offer. Interest rates on home equity loans are usually lower than long-term loans because the lender uses the house as collateral, a value they can take back if you don’t pay it back. A long-term loan is usually unsecured, which means that there is no collateral the bank can take back in the event of a default.
This is also the main disadvantage of a home equity loan. If you default on the loan, the bank can foreclose on your house. This makes a home equity loan riskier than a long-term loan, so it’s only a good option for responsible borrowers with a stable income and a substantial safety net.
Related: Best Home Equity Lenders 2021
A credit card is an example of revolving credit, which means that you can reuse your limit when paying off your balance, and there is no fixed repayment term. As long as you make the minimum payment each month, you can take your time paying off the balance. Credit cards are much more flexible than personal loans and also allow you to pay extra on the credit card balance at no additional cost.
The average total limit on a credit card is around $ 8,000, which is lower than most long term loans. Also, the interest rates on a credit card can be comparable to a personal loan, but those with excellent credit will generally save more with a personal loan.
Related: Best credit cards of 2021
401 (k) Loans
You can borrow money on your 401 (k), up to 50% of your acquired account balance or $ 50,000, whichever is less. Interest charged will be refunded directly to your account, so it’s like paying interest to yourself rather than to the bank. To avoid the early withdrawal penalties (a 10% penalty when filing your taxes), you must be at least 59 and a half years old or follow the IRS 55 Guidelines rule.
The money you borrow will not be invested during the repayment period, which means you may miss out on stock market gains. Additionally, some providers require investors to wait a period of time before resuming contributions to a 401 (k) after repaying the loan.
The maximum repayment term for a 401 (k) loan is five years. However, if you change employers, you will have to repay the money immediately. If you can’t afford it, it will count as an early withdrawal with a 10% penalty. You will also need to report the amount as income on your taxes.
Related: How to get a 401 (k) loan