Long-term loans for education, home or business are outstanding as they provide a large sum of money repaid in instalments over a long period. These loans are of various types with unique features. So, if you want a long-term loan, read on to know what you can expect.
Everyone will be required to take a personal loan at least once in their lifetime, whether they are an entrepreneur who runs a multinational company, a single mom who wants to take an education loan for her children or just planning to set up a business on their own. Loans are needed to meet any financial need. These loans are mainly of two kinds, short-term and long-term loans. Both the types have advantages and disadvantages depending on an individual’s requirements. However, long-term loans have been a popular source of financial support for many reasons, such as tax benefits, home loans, etc. With increasing popularity, the demand for these loans has risen recently. This has led to the emergence of different online loan aggregators like Buddy Loan. It provides many benefits like instant loans and multiple uses to borrowers, such as giving loans without documents. So, if you want to know more about Buddy Loan, click here.
What are Long Term Loans?
Before diving deep into the topic of long term loans, let’s find out what it is. A long-term loan is a loan with an extended repayment tenure. The repayment period can vary from 3 to 30 years, depending on the type of loan and lender. People frequently take Long-term loans like home, education, car, and business loans for their specific financial needs. Loans with a longer repayment tenure are ideal for big projects and purchases as banks can offer a hefty loan amount to their customers. Many features, such as prepayment, are provided by most lenders, making it convenient for customers to clear off their loans when possible.
With the increasing popularity of online banking, the demand for loans with longer repayment tenures, especially home loans and auto loans, has also increased due to ease of access. However, only stable and continuous-income individuals will be eligible for long-term loans. Another interesting feature about these loans is that they are also secured loans where the collateral must be submitted for long-term loans.
Loans with a long repayment tenure have unique features that attract many borrowers. These features, however, will depend on the different types of loans that the borrower takes.
A Brief on the Features of a Long-Term Loan
Every personal loan has its features from which customers can benefit. Similarly, long-term loans have features that make them different from short-term loans. While most of the following features apply to every type of long-term loan, there are very little or slight differences between a vehicle loan and a home loan.
Bigger loan amount:
long term loans are secured loans as lenders usually require a collateral submission for the approval of the loan. Since it is a secured loan and the repayment period is longer, the loan amount lenders give is usually a large sum of money compared to other kinds of loans.
Lower interest rates:
The interest rate given to customers applying for a loan with a long repayment term is low. Collateral submission is needed in long-term loans as the loan amount is significant. Assets financed by these loans are usually taken as collateral until the loan amount is paid. For example, in home loans, lenders typically take the house as collateral, while a car bought with the help of a car loan will have the vehicle as collateral. By taking collateral, lenders will not suffer a loss of money if the borrower defaults on their repayment.
The repayment for long-term loans is through monthly instalments over an extended period of time. A borrower can repay the monthly instalments in two components: the principal and interest amount.
Also Read: A Guide to Managing Personal Loan Repayment
Borrowers can enjoy tax benefits with loans of a longer tenure. However, this depends on the kind of loan taken by the borrower. If they take a home loan, they can enjoy some tax benefits. But, if a borrower avails of a car loan, they will not enjoy any tax deductions as a car is considered a luxury. These tax rebates are subject to laws under the Income Tax Act 1961.
These features can apply to the many types of loans with a long tenure, with slight differences depending on the type of long-term loan. Read on to understand more about the different types of long-term loans.
Want to Know the Different Types of Long-Term Loans?
Long term loans consist of many different types. Each type usually has its own unique features. A few examples of long-term loans are:
Pursuing higher education is everyone’s dream. However, most students will need financial assistance to pursue long-term courses or to study abroad. This is when an educational loan comes in handy. Educational loans are long-term loans given to students. The tenure for educational loans can be 3 to 30 years, depending on the requirement. The limit for the loan amount and the interest rate will be set depending on the lender and the borrower.
A home is a basic necessity for any person. It is a place of warmth and shelter from environmental factors and the storms of life. Home construction is costly, and even if an individual chooses to buy a home, it will still cost a lot. Due to the expenses, a home loan amount will be a hefty one. Therefore, the tenure for a home loan is always three years and more. A collateral is required for a home loan, along with a guarantor to sign the application. An exciting feature of a home loan is that lenders offer a prepayment option to their applicants. However, depending on the lender, this option may be chargeable or non-chargeable. There is also an option to choose a floating or fixed interest rate.
Vehicles are a necessary luxury, and everyone needs a vehicle to travel from one place to another. Although an automobile is expensive, vehicle loans support people who wish to purchase a car for their daily commute. The tenure for a car loan can vary from one bank to the other, but it usually goes beyond seven years. Prepayment and pre-closure are available for vehicle loans. However, some banks may charge a penalty fee for prepayment and pre-closure.
Personal loans taken for a repayment tenure of 3 years or more will be under long-term personal loans. The only drawback of a long-term personal loan is the high-interest rate. The interest rate remains high for these loans compared to other long-term loans, as private loans are unsecured. The lack of collateral makes it difficult for banks to give a low-interest rate. This is because if the borrower defaults on a loan, the bank will be at a loss.
Small business loan:
A long-term loan taken for business purposes by an individual or a company can be used to fund their business needs. These loans can finance the purchase of heavy machinery or a house for business use. Then the repayment is made in instalments with more than three years of tenure. These are small business loans, which both private and public sector banks provide.
Long-term payday loans:
These loans offer borrowers a long repayment period for a small loan. It is suitable to fund urgent financial requirements of borrowers while allowing them to repay the loan in small instalments over three years or more.
Long-term loans have essential eligibility criteria, although they are stringent as the loan amount is significant. Some of these criteria are:
- The borrower should be at least 21-60 years of age.
- They should be salaried or self-employed with a stable source of income.
- Should be a resident of India.
- Should have a minimum income of at least Rs 15,000 per month. This can vary depending on different banks. Some banks will offer a long-term loan only if the minimum salary is Rs 20,000 per month.
The applicant must submit a few essential documents to get approval for a long-term loan. These are:
- Proof of permanent residence
- Proof of identity: Voter ID, Driving License or Passport.
- The applicant should submit the income proof of both the applicant and guarantor.
- Salary slips of the applicant.
- Bank account statements if required.
- A filled optional guarantor form.
With all the necessary documents and criteria covered, borrowers may wonder how to manage finances when taking a long-term loan. Well, below are a few tips on how to manage a long-term loan.
How to Manage Long-Term Loans?
In this modern age of the internet, taking a loan has become an easy and common practice. People taking loans should make a habit of managing their finances so that they can make timely repayments. Long-term loans can be incredibly taxing mentally and emotionally as there can be much financial pressure on a borrower. Therefore, managing finances when one has a long-term loan is imperative. Below are some tips on how to manage a long-term loan:
Maintain a budget:
Having a budget is very important when you have a loan to repay. A budget helps a person keep a record of their expenses and spending habits, and at the same time, it prevents them from overspending.
Following the 50-30-20 rule of budgeting may help with maintaining finance. The first rule is to identify necessary expenses and strictly keep 50% of an income. Then 30% of the income can be for other needs and requirements while the rest of the income can go into savings. This way, a borrower can effectively repay their loan and improve their credit score without remaining in debt.
Keep the tenure as short as possible:
A long-term loan offers tenures of up to 30 years. The longer the tenure, the lower the EMI will be, which can be very tempting. However, the interest outgo will also be higher with a longer term. Therefore, always opt for shorter tenures if it is affordable. If a shorter tenure is not possible, then the borrower can always increase the EMI whenever they can afford to.
Make regular and timely payments:
Repaying the loans will positively impact the borrower’s financial history. It will help to increase their credit score and chances for lower interest rates in the future. Missing an EMI payment will lead to penalties and a negative impact on loan disbursals in the future.
With a considerable loan amount of long tenures, insurance will help cover the cost if anything happens to the borrower and the guarantor. Buying a term plan of the exact loan amount from regular insurance companies will lessen the burden of the loan on the borrower’s dependents or family members. If the loan is a home or car loan, the lender can seize the assets if the loan has defaulted. The borrower can avoid this with an insurance plan.
Moreover, some banks can offer insurance over the outstanding loan amount. But the insurance provided by banks is limited. A regular insurance plan can cover expenses if the lender is changed and after the loan repayment is complete.
Be alert for better rates:
The financial market is constantly changing according to the changes in the ecommerce market. There may be new changes in Interest rates and lending rules. Keeping an eager eye out may be rewarding in terms of lower interest rates. It is advised to switch to a cheaper loan if the opportunity arises. However, the borrower must be aware of the prepayment charges on the old loan and the processing fees of the new loan, if any.
Also, switching to a cheaper loan will be beneficial during the early stages of the tenure rather than in the later stage, as it will have a more significant impact on the EMI and tenure of the loan. Home loans do not usually have prepayment penalties. However, the RBI offers no restriction on other long-term loans so penalties may exist.
Opt for prepayment:
Early repayment will shorten the tenure and, at the same time, give borrowers the opportunity for a debt-free life. If the lender or banking institution does not charge a prepayment penalty and offers prepayment as an option, the borrower can go for it if they can afford to.
Understand the loan terms and conditions:
Understanding the fine print of a loan is very important. A borrower could know about penalties and fees and avoid hidden clauses that can cause unnecessary expenses only if they thoroughly read and understood the terms and conditions. Seek professional help from financial advisors or chartered accountants for a better understanding.
If borrowers have too many loans to repay, they can consider debt consolidation. A borrower in debt can do this by getting a low-cost loan to pay off all the existing debt, which will lessen the burden on the repayment of multiple loans.
Loans with extended repayment tenure, such as education, home, car, or business loans, will require the borrower to be disciplined with their finances. A disciplined and responsible borrower will have a smoother repayment experience with an improved credit rating. Loans have many benefits, some general benefits of a long term loan are given below.
Benefits of long-term loans
Long-term loans are of great significance when a person requires a big investment, whether in their business or personal life. A loan increases a borrower’s capital and gives them positive credit. This will help them achieve their goals and make borrowing easier in the future. Some advantages of long-term loans include the following:
Finance is very important in our daily lives, so investing a large sum of money into buying a car or house without the support of loans may limit a buyer’s freedom to spend. By getting a long-term loan, a buyer can reduce the time they spend saving for the asset or investment. They can use their income and savings on other important matters, such as medical expenses and other immediate needs. Therefore getting a loan will increase the cash flow of a borrower.
Lower interest rate:
Loans with a long repayment tenure offer lower interest rates as they are secured loans. The collateral a borrower offers is the asset for which the funds are borrowed.
Minimise Investor interference:
If entrepreneurs seek to expand the company or start a new project, they will need funding. There are two ways for this: getting a loan or a private investor. Getting a private investor will hamper the entrepreneur’s hold on the company as the ownership will be divided and redistributed between the owner and investor. So to maintain control, getting a long-term loan will be the better choice.
Loans with a long repayment tenure have a properly structured repayment process designed to meet a borrower’s payment capability. Thus, this leads to regular repayments and a buildup of good creditworthiness. A good credit rating will lead to easier debt financing in the future.
Whether it’s a long-term personal loan or a loan with an extended repayment tenure, a good understanding of the various features and types will help you plan well while taking up a loan. Hopefully this article will help you make informed decisions regarding critical financial matters with the strategies provided, it would also give some assistance to help you manage your finances while taking loans of a large amount.