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How Do Long-Term Loans Work?

Long-term loans are a type of loan designed to be paid back over several years. They often have low monthly repayments, but interest can add up over time.

Long-term loans, as the name suggests, are loans that are repaid over an extended period, typically up to 25-30 years, in the UK. These loans are often used for significant purchases like buying a house, funding higher education, starting a business, or consolidating debts.

However, like any financial product, it’s essential to understand how they work before making a commitment. In this comprehensive guide, we’ll delve into the ins and outs of long-term loans, helping you make an informed decision.

What Exactly is a Long-Term Loan?

A long-term loan is a type of borrowing that is paid back over an extended period of time, usually 1-5 years up to 25-30 years, depending on the purpose. Some common long-term loans in the UK are mortgages and student loans. Other examples include business loans, car financing agreements, and some types of debt consolidation loans. A long-term loan can be secured against an asset, often your home, or unsecured.

The repayment schedule will depend on the terms of the loan and can be monthly, quarterly, or annually. The interest rate can be fixed, variable, or a mix of both fixed and variable. Fixed rates mean the interest rate stays the same for the duration of the loan. Variable rates move up and down based on the Bank of England base rate or lender’s criteria.

Why Choose a Long-Term Loan?

Long-term loans can be an attractive option for several reasons:

  • They allow you to borrow larger amounts than short-term loans, which is useful for big-ticket purchases.
  • Buying a home would be impossible for most people without long-term mortgages of 25-30 years.
  • They usually have lower monthly payments than short-term loans as costs are spread over years, making it easier to budget.
  • They provide access to money for long-term investments that are worthwhile for many people, like higher education.
  • You can use them to consolidate multiple debts into one loan with a manageable monthly payment.
  • Responsibly managing long-term credit can help build your credit score.

Long-term loans usually allow you to borrow large amounts of money and then spread the costs into manageable monthly repayments over one to 30 years, or sometimes even longer. They are often offered at a lower APR than short-term loans, which may help you to manage your finances more effectively.

Are There Any Downsides to Long-Term Loans?

While the interest rates are often lower, the longer the term of your loan, the more interest you will end up paying overall. Long-term loans can also make it tricky to plan for the future, as you could still be paying off your loan in years to come. If you want to pay it off early, you may also face an early repayment fee.

While long-term loans offer benefits, they also come with risks:

  • Pay more in interest over the lifetime of the loan compared to short-term borrowing.
  • Variable rate loans leave you exposed to potential rate rises, increasing costs.
  • Early repayment charges can be expensive if you repay before the end of the term.
  • Long-term commitment can feel burdensome. Limits financial flexibility.
  • Missed payments damage your credit score and can lead to serious consequences, including losing your home in the case of mortgages.
  • Taking out too large a loan could overburden you financially.

Applying for a Long-term Loan

When choosing between a long-term and short-term loan, it’s important to evaluate what the purpose of the loan is, what you can afford to pay back and what repayment period suits you.

With long-term loans, lenders may pay closer attention to your credit rating to understand your financial circumstances and make a decision of whether you can afford the repayments in one, two, ten or even in several decades’ time.

Therefore, make sure your credit report is up to date without any errors before applying.

What Happens If I Miss My Repayments?

It’s vital to contact your lender immediately if you miss or think you won’t be able to make payments. They may offer options like:

  • Payment holidays - Temporary break from making payments.
  • Reduced payments - Pay less for a period until you recover financially.
  • Payment extensions - Paying over a longer period.
  • Refinancing - Taking out a new loan to repay existing debts.

However, missing too many payments can lead to:

  • Late payment fees and increased interest costs.
  • Negative marks on your credit file damaging your credit score.
  • Legal action such as repossession of any assets securing the loan (e.g. house).
  • Higher cost of future borrowing due to credit score damage.
  • Debt collection & court judgements if the lender obtains a CCJ against you.

What Do Lenders Look at When I Apply?

When applying for a long-term loan in the UK, lenders will assess:

  • Credit score - Good credit history improves chances of approval.
  • Income and employment - Stable and regular income is vital.
  • Existing debts - Too many debts can indicate over-stretching finances.
  • Assets – Security, like property, can help get larger loans approved.
  • Reason for loan - Sensible reasons focused on needs rather than wants.
  • Ability to repay - Comfortably able to make repayments in full and on time.

How Can I Improve My Chances of Approval?

If you’ve been turned down before, there are ways to boost your chances when reapplying:

  • Check your credit file and improve your credit score.
  • Pay down existing debts to lower your debt-to-income ratio.
  • Build your credit history by responsibly using a credit card.
  • Avoid multiple applications in a short timeframe.
  • Ask a guarantor to provide additional security.
  • Provide assets like property as collateral on secured loans.
  • Improve your job stability and grow your income.

What Are the Alternatives to Long-Term Loans?

Other borrowing options to consider:

  • Short-term loans - Quick access to cash but typically lower amounts.
  • 0% credit cards - Interest-free periods can help spread costs.
  • Overdrafts - Convenient but expensive, so use carefully.
  • Peer-to-peer lending - Borrow from individuals rather than banks.
  • Family and friends - Informal route but could strain relationships.
  • Credit unions - Not-for-profit cooperatives offering loans.
  • Payday loans - Often extortionate costs.
Important Note on Illegal Lending (Loan Sharks):

It’s important to never borrow from a loan shark, as they engage in illegal lending practices, which can be dangerous for you and your finances. If you are worried about a loan shark you should report them to the Illegal Money Lending Team.

What Are the Risks With These Alternatives?

While alternatives provide greater flexibility, it’s essential to assess the risks:

  • 0% Credit cards mean repaying before the interest free period ends to avoid high interest.
  • Overdraft daily fees and high-interest costs can quickly spiral.
  • Peer-to-peer lending is not covered by FSCS, meaning if platforms collapse you may lose money.
  • Borrowing from family/friends can damage relationships if repayments are missed.
  • Payday lenders often charge astronomical interest rates – it is usually best to avoid them.
  • Loan sharks engage in illegal lending practices - stay away completely and report any activity to the Illegal Money Lending Team.

Long-term Loans vs Short-term Loans

The main difference between long-term and short-term loans is the period over which it is repaid. A short-term loan is often repaid weekly or monthly over a shorter timescale, while long-term loans can span years or even decades.

Interest rates are often higher for short-term borrowing, while long-term loans are designed with a lower rate of interest over a longer period, meaning you may pay a lot more in interest overall.

Are Long-Term Loans Right for You?

Long-term loans allow you to spread a larger loan over more time. But higher overall interest, potential rate rises, and missed payment consequences require careful consideration. It’s important to seek financial advice tailored to your situation before committing, so you can manage debts responsibly.

At Consolidation Expert, our lenders can offer debt consolidation loans with a minimum term of 12 months. However, if you’re considering a long-term loan to help you get out of debt, there are also debt consolidation loans available that you can pay back over multiple years.

See if you’re Eligible for a Debt Consolidation Loan To Help Regain Control of your Finances

Here at Consolidation Expert, our panel of lenders may be able to provide a debt consolidation loan to help you regain control of your finances and avoid paying interest on multiple debts or credit cards.

For more information, don’t hesitate to contact us today. Alternatively, start the application process, and you could find out if you’re eligible for a debt consolidation loan.

Representative 14.8% APR

We are a broker, not a lender.

Representative Example: Borrowing £15,000 over 60 months, repaying £355.28 per month, total repayable £21,316.57.

Total cost of credit £6,316.57.

Interest rate 14.8% (variable).

The lenders on our panel offer loans for 12-360 months, with rates from 4.7% APR to 42.6% APR.

The Representative Example is based on all loans paid out by lenders between 1st Jan 2022 and 31st Dec 2022.

Further reading

Read Is it Possible to Consolidate Short-Term Same Day Loans?
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Read Can I Consolidate Holiday Loans with Other Debts?
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Read How Can I Pay Off My Debts Faster?
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