A long-term loan is often the better alternative from a borrower’s perspective. The reason is simple, because a loan with a long term has relatively small installments due to the long term. Small installments are explicitly the wish of many borrowers. They want to keep their monthly budget as low as possible.
Long Term Loan
Loans for consumer goods and cash must be viewed differently than loans taken out in connection with the financing of a property. Therefore, these should not be taken into account in the consideration.
Consumer loans are also offered for small loan amounts of less than 5,000 USD with terms of 84, 96 and sometimes even 120 months. The interest payable is then correspondingly low. The long-term loan is particularly expensive if a residual debt insurance is also taken out in connection with the loan. The costs for this are not reflected in the APR, but they do reflect the monthly installments.
How do banks assess long-term credit?
Banks offer the loan with a long term because it is in demand from customers. From a bank risk point of view, a long-term loan is rather bad because the long-term loan increases the risk of default. For this reason, the interest on a long-term loan is automatically higher. A borrower needs to know that the credit-related and term-dependent interest rates increase with the length of the loan term.
If you are looking for an inexpensive loan and otherwise have your finances in view, you will not apply for a loan with an extremely long term, but will always try to repay the loan within a moderate term of 36 or 48 months. A long-term loan also has a negative impact on the customer’s creditworthiness later. Often such loans are then combined during the term and then even rescheduled to a new loan with a long term, only to be able to repay the installments at all.
That of course costs all the money, money that the borrower doesn’t have. Even if others advise the opposite, a long-term loan is not recommended for cost reasons alone.