How long term loans can keep payments affordable

Key Ways That Long Term Loans Keep Monthly Payments Affordable

A common way of characterizing loans is by the amount of time that the borrower is given to repay the loan made by the credit agency.

Short term loans are generally those loans that must be paid back within a 1 year time-frame.

By contrast long term loans can have repayment lengths of 12-24 months with the longer term averaging 10-25 years or more.

The Higher Affordability of Long Term Loan Payments

When it comes to the size of the payment, long period loans are often significantly smaller than their short term counterparts for identical amounts.

A simple math calculation using basic division will show that paying back $12,000 over a 1 year period will result in $1,000 per month. While spreading that out over 12 years will result in monthly payments of approximately $80.

This is a somewhat oversimplification, but for the sake of demonstration we are assuming that all principal, fees and interest are fully included in the amounts in both scenarios.

From this simple example it can be seen that a short term loan in this case results in payments greater than 12 times the equivalent monthly payment of the longer duration loan. This payment reduction increases household cash flow that can then be spent on other home expenses and investments.

Long Term Loan vs. Short Term Loan Interest Rates

interest-ratesThe interest rates that go with longer period loans tend to be much lower than with short term loans. There are several reasons for this:

  1. Long term loans tend to be for larger amounts than short term loans and the lender can offer a smaller interest rate.
  2. The application process tends to be much more thorough for long term borrowers so that more credit rating factors can be taken into consideration.
  3. There is generally some form of collateral requirement that the borrower pledges to the lender in longer duration loans that reduces the lender’s risk.
  4. The interest rates of longer period loans tend to be driven by lower bank loans and other federal bank to bank lending rates

Long Term Loan Risks

Several risks are associated with longer period loans. The biggest risk results when the borrower defaults and the lender assumes ownership of the property pledged to them. This property is generally sold, often at or below market wholesale prices, with the primary goal being for the lender to recap their own losses. Any gap between the amount still owed to the lender and the value of the collateral can result in a lawsuit by the lender to recoup that difference.

Longer duration loans can also have severe negative impacts on the borrower’s credit scoring when they are not repaid. Some lenders e.g., American Express, have one credit reporting policy for their short term customers and another one for loans that are given more than a year for repayment. The short term customers get preferential treatment with not having all of their late activity reported, while the long term customers are not given this gratuity.

Additionally, some types of long duration loans have adjustable interest rates that can increase the monthly payments.

Comparison of Long and Short Term Loans

Loan TypeDurationInterest and Fees Details
Overdraft ProtectionShort TermHigh Fees and Penalties
Revolving Line of CreditShort TermHigh Interest Rate and APR
Payday LoansShort TermVery High Interest/APR
Pawn LoansShort TermVery High Interest/APR
MortgageLong TermLow Interest Rate/APR
Term LoansGenerally Long TermModerate – Low Interest/APR
LeasingGenerally Long TermModerate – Low Interest/APR/Money Factor

Summary

Long term loans can provide many advantages in terms of lowering monthly payments and freeing up household cash for purchasing necessities and investing.

Some of the key advantages of long period loans include:

  • Lower interest rates
  • Frequently fixed interest rates
  • Can be used to build good credit rating
  • Leasing provides ownership benefits and only paying for short term use

People use the length of these loans typically for large purchases. Repayment terms for smaller amounts vary usually from paycheck to paycheck or 6 month to a year. Some folks would like to take out a personal loan for 12-24months either to build credit or need an extra couple grand for miscellaneous purposes. The difference can vary depending on what the consumer needs the cash for.

solutionOnlineCash4Payday.Com has been providing a safe and secure online lending platform for over a decade online. Whether you need a short term loan or maybe a longer term solution, our lending partners can help you get the cash you need today. High approval rates and all rates and fee’s are provided up front before final processing. Call, email, or start with our online form today.

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How long term loans can keep payments affordable | OC4P.Com
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How long term loans can keep payments affordable | OC4P.Com
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Overview of long term loans and options that are affordable. Safe and secure lending platform.
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