Pros and cons of long-term personal loans

The difference between a standard personal loan -- like the kind you see in online ads and in your mailbox -- and a long-term personal loan is subtle. Still, it’s important to know the differences between the two as these simple changes can substantially impact your financial bottom line.

What is a long-term personal loan?

A long-term personal loan is incredibly similar to a personal loan: it’s a large lump sum paid to the borrower and paid back with a fixed monthly payment over a set term. The biggest difference is that the time you have to repay a long-term personal loan is typically longer than five years. Having a few extra years to repay the debt can make a big difference when it comes to financing large purchases like medical bills and home repairs.

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Because of the lengthier repayment period and higher interest rates involved, this type of financing is best used when borrowing large amounts of money like between $10,000 and $50,000.

How long does it take to pay off a long-term personal loan?

As always, loan terms vary by lender, but most long-term personal loans offer a repayment period of up to seven years.

Finding this type of loan can be a bit trickier; long-term personal loans can be harder to find (and even harder to obtain) thanks to stricter credit requirements. In the bank’s eyes, the longer you have to repay a loan, (particularly and unsecured loan where no collateral is required) the longer you have to default on the loan. So, they view these loans as riskier than their shorter-term counterparts.

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Out of the lenders listed below, the minimum credit score required for qualification falls between 600-680, meaning long-term personal loans may be out of reach for those with poor credit.

Current online lenders offering long-term personal loans include:

• Marcus by Goldman Sachs
• Lightstream
• SoFi
• Discover Personal Loans

When considering a long-term personal loan, it may also be worth it to go the “old-fashioned” route and drop into the local branch of your bank or credit union. If you already have an existing relationship, these financial institutions may offer better interest rates or more favorable repayment terms than what online lenders can provide.

Long-term personal loans: The pros and cons

The biggest advantage of a long-term personal loan is having a longer length of time to repay the money. A longer term also means your monthly payment will be substantially lower than with a more traditional, “short term” personal loan.

The biggest drawback to the long-term personal loan is the amount you’ll pay in interest. (Not to mention it will take you longer to become debt free.)

• For example, say you need to borrow $25,000 to make several expensive home repairs. At a 17 percent annual percentage rate on a 36-month personal loan, you’ll pay $7,087 in interest.
• Bumping the repayment term out to seven years, you’ll lower the monthly payment by over $300, but you’ll pay $17,914.78 in interest, a difference of over $10,000.

Additionally, because long-term loans are considered “riskier” in the eyes of the bank, many long-term loans charge APRs at the same interest rate as many credit card companies, with some APRs going even higher.

For those who have access to other financing options, such as balance transfer offers or low-APR personal loans, these can be the better, cheaper option. If you are currently maxed out on debt or living paycheck to paycheck, however, finding a nice, low monthly payment can be a great way to get a handle on debt without the added worry of coming up with another hefty monthly minimum payment.