Everything You Need to Know About Long-Term Personal Loans
Most people think of a personal loan as a short-term financing method with terms typically ranging from two to seven years. Borrowers use these versatile loans to fund home remodels, pay for medical expenses or even to consolidate credit card debt. You can always find tips and resources for learning how to manage money on this address.
But did you know that long-term personal loans also exist? Here’s what you should know about this type of loan, including when it might be the right option for you.
What Is a Long-term Personal Loan?
A long-term personal loan has repayment terms lasting at least five years. Many personal loan providers cap terms between five and seven years, but some lenders offer terms as long as 12 years.
Most long-term loans have higher interest rates than short-term loans. This is one of the biggest drawbacks when it comes to long-term vs. short-term loans. The main benefit, however, of a long-term loan is a lower monthly payment, which can make it easier for borrowers to afford.
For example, let’s say you apply for a $20,000 personal loan and receive two offers: The first has a four-year term with 5% APR and a $461 monthly payment. The second option has an eight-year term, 10% APR and a $303 monthly payment. This lower payment fits your budget better, so you go with the eight-year loan. Keep in mind that although you would have a lower monthly payment, you would also pay more interest over the life of the loan.
Borrowers can always pay extra on the loan, but some lenders charge a prepayment penalty for paying off the loan early.
When Should You Get a Long-term Personal Loan?
Long-term personal loans may be appropriate for borrowers who need more flexibility in repaying their loans and prefer lower monthly payments.
If you have a variable, seasonal or commission-based income, you may opt for a lower minimum payment with the option of paying extra when you can afford it. If you can find a lender that doesn’t assess a prepayment penalty, you won’t owe a fee if you repay the loan ahead of schedule.
Where to Get Long-term Loans
Banks, credit unions and online lenders often provide long-term personal loans. Here are our top picks.
SoFi’s long-term loans have a maximum term of seven years and limits up to $100,000. Interest rates for SoFi’s long-term loans range from around 10% to 15%. Unlike other lenders, SoFi doesn’t charge any prepayment penalties, origination fees or late fees. The minimum credit score requirement is 680.
Lightstream has the longest payoff terms among the providers on this list, with terms as long as 12 years. Borrowers need to have a credit score of 660 or higher to qualify. High-qualified applicants can borrow up to $100,000. Interest rates for long-term loans range from around 6% to 20%.
If you’re looking for the longest term personal loan with the highest total loan amount, Lightstream may be the best fit for you.
Marcus has the shortest terms available compared to the other lenders, with a six-year cap. The minimum credit score needed is 660, and the APR tops out at around 20%. Borrowers can take out up to $40,000. It takes about 24 hours to be approved and between one to four days for the money to reach your bank account.
Borrowers who don’t need an exceptionally long term and high loan amount can stick with Marcus.
Long-term Loans for Bad Credit
If your credit score is below 660, you may find it more difficult to qualify for a long-term personal loan with a traditional lender.
Lenders like Upstart and Lending Club specialize in personal loans for consumers with bad credit. If you don’t meet the minimum credit score requirements of one of the three lenders listed in the section above, consider Upstart or Lending Club.
Pros and Cons of Long-term Loans
Long-term loans have several benefits and drawbacks. Here’s what to know before you apply for a long-term personal loan.
Pros of Long-term Loans
- Monthly payments are often lower than short-term personal loans.
- It’s easier for a borrower to manage a long-term loan payment on top of other bills and debts.
- You can still borrow large amounts with a long-term loan.
Cons of Long-term Loans
- Interest rates are higher for long-term loans, which increases the total interest paid.
- Applicants need to have good credit.
- It may be harder to find a lender offering long-term loans.
- You may be assessed a prepayment penalty if you repay the loan early.
Long-term Loan Alternatives
Borrowers wary of long-term loans can explore one of the following options:
Home Equity Loans
Home equity loans borrow against the built-up equity in your house. Your equity is your home’s current market value minus the remaining mortgage balance. You generally need to have between 15% and 20% equity in the home to qualify.
The terms last between five and 30 years, so you may receive a longer term than what a personal loan lender could offer. Interest rates on home equity loans are generally lower than rates for long-term loans because the lender uses the home as collateral—something of value that the lender can repossess if you fail to repay. A long-term loan is typically unsecured, which means there’s no collateral for the bank to repossess if you default.
That’s also the main downside to a home equity loan. If you default on the loan, the bank can seize your home. This makes a home equity loan riskier than a long-term loan, so it’s only a good option for responsible borrowers with a stable income and a substantial safety net.
A credit card is an example of revolving credit, which means you can reuse your limit as you repay your balance, and there’s no fixed repayment term. As long as you make the minimum payment every month, you can take your time repaying the balance. Credit cards are much more flexible than personal loans and also let you pay extra on the credit card balance with no extra fee.
The average total limit on a credit card is about $8,000, which is lower than most long-term loans. What’s more, interest rates on a credit card may be comparable to a personal loan, but those with excellent credit will usually save more with a personal loan.
You can borrow money from your 401(k), up to 50% of the vested balance in your account or $50,000, whichever is lower. The interest charged will be repaid directly to your account, so it’s like paying interest to yourself instead of the bank. To avoid early withdrawal penalties—a 10% penalty when you file your taxes—you need to be at least 59 ½ years old or fall within the rule of 55 IRS guidelines.
Any money you borrow will not be invested during the repayment period, which means you may miss out on stock market gains. Also, some providers make investors wait a certain period of time before resuming contributions to a 401(k) after repaying the loan.
The maximum repayment term for a 401(k) loan is five years. If you change employers, however, you’ll have to repay the money immediately. If you can’t afford that, it will count as an early withdrawal with a 10% penalty. You will also have to declare the amount as income on your taxes.