Very few people have the money they need to make any purchase at any time on hand. When you have the opportunity to make a larger purchase, or when a hefty unexpected expense comes up, you might not have the money you need to pay for it. That doesn’t mean you are automatically out of luck, however, thanks to credit.
There are various forms of credit available for making purchases or covering an emergency expense if you don’t have the money in savings. This article will explain how long term personal loans work and explain the most important concepts you need to understand.
What is a Long Term Personal Loan?
Long term personal loans can vary and look different from financial institution to financial institution and borrower to borrower. In general, a long term personal loan is a set amount of money that you borrow with a repayment term of at least one year, but often five or more years.
Your payment is set in stone once you sign the paperwork, which can be a good thing because you won’t be tempted to just pay the bare minimum as you could on a credit card. This could also be seen as a downfall, however, if you run into financial struggles before the loan is paid off.
The Federal Reserve reports $2,984,800,000,000 in outstanding non-revolving consumer debt as of the end of February 2019. That’s over two trillion dollars of consumer debt for expenses such as vehicles, education, travel, and more. This number increased over $150 billion between 2017 and 2018, and increased more than $27 billion in the first two months of 2019.
The majority of this debt is owed to depository institutions, like banks or credit unions, with the federal government in a relatively close second place for debt such as federal student loans. Regardless of where money is being borrowed from, the fact remains that American consumers are borrowing quite a bit of money, and a long term personal loan is one way to do so.
Benefits of Long Term Loans
One of the main benefits of a long term loan is the chance to lower payments by extending them out over a longer period of time. Of course, this means you will pay more in interest over the life of the loan, but if a lower payment is what is important for your budget, getting those payments lower is possible with a long term loan. Making your monthly payments on time over the life of the loan should boost your credit score over time as well.
Long term personal loans can be used for a variety of purposes. Borrowers might want to consolidate their credit card debt, giving them just one payment each month instead of multiple. If a borrower has credit card debt with a high interest rate, refinancing that debt into a long term personal loan can save the borrower money on interest payments over time. If you have high interest debt of any form, it might be worth exploring whether a personal loan could save you money.
Long term personal loans can also be used for expenses, both planned and unplanned. Maybe you have been planning a major home improvement project, or the purchase of a new car, boat, or camper. A personal loan can be combined with a down payment to cover these planned expenses.
If your family faces an unexpected medical emergency and you would rather pay the health care provider as soon as possible, a personal loan can be taken out to cover the expenses. Personal loans can also be used to help cover costs associated with major life changes, such as a marriage, divorce, or new baby.
Long Term Loan Companies
Long term loans can be provided by both brick and mortar financial institutions and online peer to peer lenders. The main difference between traditional financial institutions and peer to peer lenders is the source of the loan funding.
Traditional financial institutions have access to lendable funds through bank deposits. Peer to peer lending companies receive funding from individual investors. Lending Club and Prosper were two of the first peer to peer lenders to enter the market. Since that time a number of other peer to peer lenders have entered the market and focus on serving more specialized market segments.
Because the smaller peer to peer lenders specialize in certain market segments, they can sometimes offer a more flexible approval process. It makes sense to consider more than one option so you can compare different loan options and choose the best one for your financial needs.
We have included information on some top online personal loan options below:
Upstart utilizes a unique algorithmic lending model that considers additional personal attributes such as your education and future employment as part of the lending process. The objective is to provide more people with access to credit at more affordable interest rates.
You can read more about how Upstart compares with LendingTree vs Lending Club.
Payoff is a peer to peer lender that focuses on refinancing credit card debt with personal loans. Payoff’s platform focuses on a combination of education and support to new borrowers understand how to improve their personal finances.
Payoff members that paid off at least $5,000 of credit card debt and made on time loan payments saw an average increase in their FICO score of 40 points within four months of receiving their Payoff loan.
See our comparison of the Best Lending Club Alternatives for more information.
Upgrade combines affordable online credit along with free credit monitoring and education. Borrowers can choose from personal loan amounts that range from $1,000 to $50,000.
The personal loans are offered with fixed interest rates over a 3 to 5 year period. Additionally, there are no prepayment fees if you want to repay your loan early.
LendingTree doesn’t directly provide personal loans. Instead, LendingTree acts as an intermediary and goes out to the market and lets other lenders bid for your business.
This means that LendingTree will let you complete one lending application and you can sit back and wait for other lenders to compete for your business.
Prosper was founded in 2005 and is one of the largest peer to peer online lenders. Since its founding in 2005, Prosper has originated over $16 billion of loans on its platform.
One of the unique aspects of Prospers platform is that you can borrow money or you can invest extra money into a portfolio of consumer loans to earn a return on your savings.
You can read our comparison of Prosper vs Sofi vs Payoff for more information about loan options.
Secured vs. Unsecured
You have two main options when it comes to applying for a loan: secured or unsecured.
A secured loan means you are putting something up for collateral, which means the financial institution lending you money has the authority to take possession of your collateral if you don’t follow through on your repayment agreement. Often, the item you are borrowing money to purchase, such as a car or boat, can be the collateral used to secure the loan. Certificates of deposit, life insurance policies, and savings accounts can also sometimes be used to secure a loan.
An unsecured loan means that the financial institution doesn’t require collateral for them to be willing to loan you money. Not everyone is eligible for an unsecured loan, in fact you likely have to have a pretty high credit score to be eligible. Interest rates might be higher as well, as the financial institution is taking on a level of risk by lending to you without collateral.
A secured loan is easier to get, as it is less risky for the lending financial institution. If you have a lower credit score, you are more likely to qualify for a loan if you have collateral to secure it with. You are also sometimes able to get a larger loan, based on the value of your collateral, than you would be able to get if you chose to apply for an unsecured loan.
Revolving vs. Installment
A personal loan is considered an installment loan, as the loan will have a set payment amount and term. You receive a lump sum at the beginning, then pay it back in monthly installments over the life of the loan.
Credit cards or lines of credit would fall under the category of revolving credit. You will have a limit of how much you can borrow, but there’s no set amount of money you are borrowing. You can borrow a certain amount, pay it back, and then borrow more. Or, you can keep borrowing until you have reached your credit limit.
Revolving credit provides you with a maximum loan amount and you have the ability to utilize as much of that loan amount as necessary. An installment loan starts with a specific amount of money that you are borrowing, and it’s up to you to pay it back in specific installments.
Fixed vs. Floating Interest Rate
A fixed interest rate means that you and the lender agree upon the interest rate at the time you borrow money, and that is the interest rate you will pay for the life of the loan. Regardless of what happens to market interest rates, your rate is locked in when you’ve chosen a fixed interest rate.
With a floating, or variable, interest rate, your rate could change as the market interest rate fluctuates. This could be a good thing or a bad thing, depending on which way the market rates shift during the life of your loan. Your payment amount might vary as the rate changes, instead of being the same payment over the life of the loan.
Again, this could be a good thing if your payment goes down, but you also run the risk of ending up with a higher monthly payment. Another benefit is that your interest rate often starts out a little lower than a fixed rate loan, but again, that comes with the risk that it could increase at any time.
If you are borrowing money for a longer period of time, a fixed rate loan might be a better option. When you’re borrowing money that you plan to be paying back five years down the road, you are taking a gamble as a lot can happen in the market within that amount of time. You also have the peace of mind that comes with knowing exactly what your payment will be every month for the life of your loan, and you don’t have to be as concerned with market rate increases.
Available Loan Amounts
Personal loans are available in amounts ranging from $1,000 to $50K. The higher the loan amount, the more likely you are to have a higher interest rate as the lender is at more risk of you not paying the full amount back.
Your interest rate can vary based on the amount you are requesting to borrow, your credit score, and the lender you choose. Shop around for the best interest rate, and don’t forget to compare rates at both financial institutions near you and credible online lenders.
Personal loans are often set up to be repaid within anywhere from 12 months to 10 years. While a longer loan term amount will mean cheaper monthly payments, a shorter term usually means a lower interest rate. If you can afford a higher monthly payment, going with a lower interest, shorter term repayment plan will save you money over the life of your loan.
You might be intrigued by the idea of a balloon payment personal loan. A balloon payment means that you make much smaller payments over the life of the loan, then make a much larger “balloon” payment at maturity.
While the lower monthly payment might seem intriguing, you have to either have a plan to sell the asset to afford the balloon payment, or be extremely disciplined in putting money into a savings account monthly in order to be able to afford to make the balloon payment.
When applying for a long term personal loan, be sure to pay close attention to the loan fees and factor them in when choosing a lender. Many lenders charge an origination fee, which covers the cost of processing your loan.
Origination fees are often a percentage of the amount you are borrowing, so the higher the loan amount, the higher the origination fee. This origination fee typically ranges from anywhere between 1% and 8%.
It is also important to know that some lenders will actually charge you an additional fee to pay your loan balance off early. When the lender signs off on your loan, they are expecting to get a certain amount of income from the interest you are paying.
If you pay it off early, the financial institution loses out on that income they were expecting so some will make up for it by charging what is called a prepayment fee. This fee could be different at varying points in the life of your loan, so be sure to know upfront how much it will cost you to pay the loan of early if that is your plan.
Of course, failure to make your monthly payment in time can result in late fees. This fee is completely avoidable, and it’s up to you to do so. Simply make your monthly payments on time each month, and this is a fee you can skip entirely.
One of the main things a lender will look at when determining whether or not to approve your loan application, as well as how much they are willing to lend you if they do, how long they will allow you to extend the life of the loan, and what the interest rate will be, is your credit score. Many lenders are looking for a credit score of at least 600 before they’ll even consider lending to you.
You will also likely need government issued identification, proof of your address, and information about your employment status and income to apply for a personal loan. If you are applying for joint credit, information will be needed for both of you.
A long term personal loan can be a great way to get the money you need to pay for an important expense. In some cases, you may need an emergency cash loan. In other situations, it may be a planned expense that is too large for your monthly budget. Many people also use personal loans to refinance credit card debt at a lower interest rate. If any of those situations apply to you, it might make sense to consider a long term personal loan.