When is a long term personal loan the right choice?

Erik J. Martin
The Mortgage Reports contributor

Personal loans to cover larger expenses

Sometimes in life, we need to borrow large sums of money. If it’s for a home, this is in the form of a mortgage. To purchase a car, an auto loan comes in handy. When you yearn to renovate, the options include a home equity loan, HELOC, or cash-out refinance. But what if you have other needs? Thankfully, long-term personal loans are available, if you qualify.

A long-term personal loan has its pros and cons. This funding option allows for flexibility, but it comes at a cost. Knowing what’s involved and required is important.

Find out the facts and explore your options. You may conclude that a long-term personal loan is the best choice for your needs. If so, go into the process armed with education, and be prepared to ask questions.

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Long-term personal loans can help in a pinch

Say you’re expecting to undergo a costly operation. Maybe you have rising medical bills that you can’t afford to pay right now. Perhaps you’re involved in a court case, and the legal fees are piling up. A big ticket wedding could be right around the corner. Or it’s possible you have several outstanding debts and want to bundle them into one loan at a lower interest rate.

A long-term personal loan can help with all of these scenarios.

“These loans have several purposes,” says Bruce Ailion, Realtor and property attorney. “They can help when you have an unexpected expenses and don’t have cash or other credit. Or maybe you want to finance the expense at a lower rate than a credit card will charge.”

Ailion provides other hypotheticals.

“Say your car needs a major repair. Or suddenly you need bail money and a lawyer. Or you have to travel far to get a new job,” he says. “These are often episodic one-time expenses for which you need money right now and want to repay it over a long period.”

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How long-term personal loans work

A long-term personal loan, sometimes called a signature loan, is an unsecured loan. That means it does not require physical collateral—like your house—to secure repayment. The lender only requires that you qualify and promise to repay the loan. You should be able to use the funds for almost any kind of purchase, too.

Because there is no physical collateral needed, a long-term personal loan is riskier for the lender. Hence, lenders often charge a higher interest rate on these loans than they would for a secured loan like a home equity or auto loan.

“The rates on these loans can vary from around 8 to 18 percent,” notes Ailion. A higher credit score and less accumulated debt may land you a lower rate.

They’re also different from other personal loans in that you’re allowed to pay the money back over a longer term—commonly five years or longer.

“As a rule of thumb, a short-term loan is often for 12 months or less,” says Mike Scott, senior mortgage loan originator for Independent Bank in Dallas.

“Consider that most personal loan lenders don’t offer terms above five years. So this is a relatively unique product offering,” says Michael Funderburk, general manager of Personal Loans for Lending Tree. “The benefit of a longer-term personal loan is that you can bring your monthly payment down even lower than a shorter-term personal loan. That’s because you’re spreading out the payback period.”

Who can benefit

“Generally, borrowers with a good credit history who need to manage their monthly cash flow are good candidates. But lenders view these loans as having higher risk,” says Funderburk. “So they only offer them to more credit-worthy borrowers.”

To qualify for a long-term personal loan, you usually need a FICO credit score above 640, Funderburk notes. However, each lender has different underwriting criteria.

“Generally, it is based on your income and credit history,” he adds. “It also includes what percentage of available credit you’re currently utilizing.”

In addition, “the lender will ensure your debt load is manageable based on what you earn,” Scott says. “Some loan programs calculate the maximum payment as a percentage of your monthly net income.”

Say you don’t own a home or have too little equity accrued. In these cases, you won’t be eligible for a home equity loan, HELOC, or cash-out refi. That also makes you a good candidate for a long-term personal loan.

Perhaps the best reason to pursue a long-term personal loan is to get out of debt quicker.

“You can consolidate your debts into a single monthly payment with a fixed-term loan. This can often save you thousands of dollars in interest versus keeping outstanding revolving debts. Plus, this move can improve your credit score. And it can help you access capital at better rates in the future,” explains Funderburk.

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Where to apply

Ailion says banks, credit unions, and finance companies typically offer long-term personal loans.

“Recently, there has also been an explosion of online sources offering loans like these. Many online lenders offer teaser rates that go up if the loan isn’t paid back quickly,” he says.

For example, adds Ailion, “borrow $5,000 for 90 days at 5 percent. Past 90 days the rate goes up to 10 percent.”

Before committing to a long-term personal loan, know what you’re getting into. Know the repayment deadlines. Ask about any fees or penalties, including for accelerated payment of your balance. And learn if the loan can later be refinanced without penalty.

Check my eligibility for a personal loan up to $100k * (Jul 30th, 2021)

*TheMortgageReports and/or our partners are currently unable to service the following states – CA, NV