Long-term loans | Complete guide

Long-term loans have become one of the facilities that can benefit us the most today. The fact that we can pay a credit debt several times allows us to keep the value of the installments to a minimum. In some cases, it is almost imperceptible, which makes payment easier.

Even more so if it is to invest in something like a business or a new company , since the long-term results can be very good and the credit will have been worth it. But it is also useful in many others, such as financing the purchase of a residential property.

What is a personal loan?

It is a financial product offered by banks, which lend money to the service applicant, without having to prove its purpose , being a contract between the client and the financial institution.

This means that we receive a previously agreed amount, plus interest and then we must return the amount within a specified period of time , through a signed contract.

The personal loan is the most practical solution for those who need quick money and thus be able to invest it in a purpose. Most of the time, they are requested to solve an emergency, pay debts, withdraw the credit card or a special check.

What are long-term loans?

They are a type of business financing in which the loan maturity date extends beyond one year and can even last up to 20 years (for example, commercial real estate loans). It is used mainly for us to finance long-term projects, such as business expansion, franchises, purchase of property, equipment and other fixed assets.

What are long-term loans and when to apply for them
Advantages and disadvantages of long-term loans

What are the advantages of long-term loans?

Longer payback period

With a longer repayment period, we won't be under pressure to pay off the full loan amount quickly. However, this does not mean that we should neglect the monthly payments and get them out of our mind. Since this is a long-term expense, we will still need to have a plan to deal with the debt .

Lower interest rates

Long-term loans generally have lower interest rates than short-term debt . This is because the financing application is much more rigorous, since it implies a greater risk and also more money. However, we must bear in mind that we will spend more on interest.

We can finance important expenses

The goal of any business is profit, and with that comes the ability to scale or grow. When we start a business, we cover many parts of the business. However, as our business grows, we will have to hire people to work with us.

The more our business scales, the more expenses we will have to cover, and some of them will be very expensive. For example, if we need to automate the production of a product, we will have to buy the machinery, which can come at a very high price. By introducing long-term loans, we will be able to finance the high-value expenses that this acquisition entails.

What are the disadvantages of long-term loans?

We must pay more in total interest

Even if interest rates are lower with long-term loans, we will still have to pay more in interest , because the amount we will borrow is greater than the amount that can be provided with short-term financing.

We must assess the individual situation. We may be paying more in total interest, but if the expense is an investment and leads to more sales (for example, buying machines to produce more units), then a longer duration loan is the best option to grow the business .

Limit monthly cash flow

Although the time to pay it will be longer, it is highly recommended that we make regular payments , since we do not want to spend more on interest. With regular payments, we can restrict our cash flow.

More rigorous application process

Since the amount of the long-term loans is much greater than the amount provided by the shorter term credit, the lenders will be at greater risk. To minimize that risk, the application process is more stringent to eliminate applicants who do not have the credit history or the ability to pay off debt .

How to get a long-term loan

Long-term loans are difficult to obtain for start-ups. Generally, only established businesses with a few years of financial success are approved for long-term bank loans . For approval, our company must have a business plan and several years of historical financial statements in order to obtain financing of this type.

In addition, we have to prepare forecast financial statements to show that we can pay. Before a small business seeks a long-term loan, you should always compare the cost of the loan with that of the lease of the asset you want to finance . Interest rates on a long-term loan are usually a few points higher than interest rates on a short-term loan in a normal economy.

If we are aware of the prime rate, we can add a few points to that and find something close to the interest rate that the bank will charge us. Those few points will reflect how risky the company feels. The riskier it is, the more points it will add to the prime rate . When assessing risk, banks will examine the 5Cs of our company's creditworthiness.

When should we get long-term loans?

When our business is solvent.

They are more accessible to companies that have proven themselves, increasing sales and having sufficient cash reserves that are characteristic of larger companies. Because lenders want to minimize risk, they will lend to those who have the ability and the track record to pay back.

Small businesses and start-ups are at a disadvantage with this type of financing , since they do not have the history or the credibility yet, because they have just started.

Our need to borrow extends beyond one year

If we are requesting financing because our project will last several years, long-term credits are the best option compared to short-term credit . This is because they provide the amount and term best aligned with the purpose of our credit.

We will not be able to buy real estate with a short term loan , as we will have insufficient funds. In the same way, we cannot use a longer duration to pay the salary of the employees during the month, since we will end up spending the excess funds unnecessarily.

Have an actionable payment plan for the long term

If we do not have short- and long-term plans to pay off our debt, we could have detrimental effects on the business . Irregular payments will end up making us pay more in interest, but if we stick with regular payments we won't have to spend more.

5 questions to ask when comparing long-term personal loans

  • What is the interest rate on the loan? This largely defines what our payments will be during the course. It is important to take our interest rate into account when calculating what our monthly payments will be. In this way, we will know exactly what type of interest rate we will have to aspire to when we request it.
  • Is the loan secured or not? Secured loans require collateral and typically have lower interest rates compared to unsecured loans, which do not.
  • How much is the loan amount? The amount we can borrow depends on several factors such as our credit score, what we need the funds for, our ability to provide adequate collateral, annual income, and monthly expenses.
  • Can we repay the loan early? Payment flexibility can be important to us even if we want long-term credit. We may get some cash and want to make additional payments or decide to pay it in full before the original payment date. To do this, we must first find out if we can do it without receiving a penalty.
  • What are the other fees and charges for the loan? Our contract should be reviewed for a complete list of charges we must pay. Some longer-term loans have maintenance fees and other small fees that can add up quickly to make the credit that much more expensive.

Choose between fixed and variable rates

When looking for a loan, we can have the option to choose between a fixed or variable rate . Each has its benefits, and some lenders even allow you to have a fixed rate near the beginning of our application term and change it to a variable rate later.

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