A form of loan that is paid off over an extended period of time greater than 3 years is termed as a long-term loan. This time period can be anywhere between 3-30 years. Car loans, home loans and certain personal loans are examples of long-term loans. Long term loans can be availed to meet any business need like buying of machinery or any personal need like owning a house.
Long-term loans are the most popular form of credit in the financial industry. With the advent of technology and easy banking, home loans and auto loans have become a prevalent form of loan. These loans generally offer a hefty loan amount and are thus spread over a considerable period of repayment tenure. Features of long-term loans can vary considerably depending upon the cause for which these loans are being taken. Long-term loans almost always offer pre-payment option to customers so that people who want to pay-off their loan earlier than the stipulated timeframe do not have to pay continuously for long tenures.
Long-term loans are sanctioned based on the regular income of an applicant and generally require a continuous source of income as well as collateral to be submitted with the lending bank.
Features of long-term loan
Features of long-term loans are generally similar across loan products however, they differ based on the category of loan. Hence, home loans differ slightly in features with respect to vehicle loans.
- Higher loan amounts
Long-term loans generally come with higher loan amounts. Hence, home loans, auto loans etc. offer hefty loan amounts as compared to short-term loans like personal loans. Since, these loans are mostly secured via collateral submission hence banks are not apprehensive in lending heavy loan amounts to long-term loan applicants.
- Lower rate of interest
Since the time period of loan repayment is higher for long-term loans, banks and other lending entities levy lower rate of interest on these loans. Hence car loans and home loans come at lower rates than personal finance.
- Collateral Submission
Since the loan amount involved in long-term loans is way higher than other types of loans, collaterals are almost always required to be submitted to the bank. This helps banks in recovering lost cash in case a borrower defaults to repay the loan.
- Repayment in installments
Repayment of long-term loans generally happens in equated installments spread over a substantial period of time. These monthly installments are generally made up of two components, principal and interest.
- Tax Benefits on long-term loans
Tax benefits are applicable on long-term loan repayment. However, this depends upon the type of loan. For example, an auto loan is a luxury loan and hence it does not offer any tax rebate whereas home loan is a loan for the basic need of housing and as such offers tax exemption on the repayment of loan. These tax benefits are subject to laws under the Income Tax Act.
Examples of long-term loans
Long-term loans are loans whose repayment is spread over a long period of time. This definition applies to several types of loans. Long-term loans is just a broad category of loans and is a wide umbrella which has numerous sub-categories of loans under it. Listed below are some of the most prominent examples of long-term loans.
- Education Loans
Education loans or student loans are generally granted for a long period of time especially for courses like engineering and medical. These loans offer a longer repayment tenure to applicants. These loans are taken for a period of more than 3 years and this can go up to a period of 30 years. Education loans can be taken by applicants who wish to go for higher studies in India as well as abroad. The loan amount limit and the rate of interest might differ according to the lending entity as well as according to the course for which loan is being sought.
- Home loans
Home loans are one of the most suitable examples of long-term loans. The tenure for home loans goes much beyond 3 years and the loan amount is considerable. Collaterals require to be submitted to the bank and a guarantor also is required to sign the loan application. These loans offer pre-closure option to customers and depending upon the lending bank, this option may be charged or not charged. Home loans also give buyers the option of choosing between fixed and floating rate of interest.
- Car Loans
Car loans have slowly become the most necessary loan instrument in recent times. Since the time banks eased the process of obtaining credit for purchase of vehicles, taking car or auto loans have been on the rise. Cars are considered as luxurious items and as such rates offered on these loans are higher than those for home loans. However, stiff competition among lending entities have forced banks to lower the rate of interest for car loans. A typical car loan may have a long-term payment tenure of up to 7 years. Pre-payment of loan is available for car loans and is subject to a pre-closure fee in case of certain banks. On the other hand, some banks do not levy any penalty fee on pre-payment of car loan amount.
- Personal Loans
Personal loans that offer a repayment tenure of more than 3 years come under the category of long-term loans. However, even when these loans are longer in tenure, the rate of interest offered is not low because personal loans are mostly unsecured loans and as such borrower does not need to submit any collateral as security. Banks do not have any collateral to fall back on in case a borrower defaults to pay back his/her personal loan.
- Small Business Loans
Long-term loans can be availed by both individual customers as well as companies. For expansion of business or buying of heavy machinery, business houses may also require credit in the form of loans. These loans are known as small business loans. These loans can have a tenure greater than 3 years and can have loan repayment installments that last for a substantial number of years. All major public and private sector banks offer small business loans as part of their loan portfolio.
- Long-term payday loans
Long-term payday loans are small loan amounts that are offered for a long repayment tenure. These loans require similar eligibility criteria and documents that are needed for other types of long-term loan. These loans are best suited for urgent financial needs of customers who wish to pay in small installments over a substantial repayment period.
Know more about Personal Loan
Know more about Small Business Loans
Eligibility Criteria for long-term loans
Long term loans offer huge loan amounts and as such have stringent eligibility guidelines. However, these criteria differ with different lending banks. Listed below are some of the most common criteria that apply to almost all long-term loans.
- Applicant should be aged between 18-35 years of age
- Applicant should be earning a regular income
- Applicants should be a resident of India
- A guarantor is required to sign the loan application
Documents required for long-term loans
Certain documents needs to be submitted to the lending bank for approval of any long term loan. The list of these documents differs according to the lending bank. Most banks require a copy of the following listed papers.
- Proof of permanent address
- Proof of identity, passport, voter ID, driving license etc.
- Income proof of co-applicant/guarantor
- Optional guarantor form, duly filled
- Bank account statements if required by the bank
- Salary slips of the applicant
FAQ’s on Long Term Loans
- What are long-term personal loans?
Ans: Long-term personal loans are offered to customers who wish to avail credit for a longer tenure but are in urgent need of cash for purposes that cannot be defined as a loan category. For example, a wedding in the family or house renovation etc.
- How are long-term loans better than short-term loans?
Ans: The biggest advantage of long-term loans is that these offer longer tenures and hence lower rates of interest. The biggest disadvantage of long-term loans is that you will almost surely be required to submit some form of collateral to avail this loan.
- What role does my salary play in helping me secure a long-term loan?
Ans: An applicant's salary is crucial to obtaining long-term credit. Regular income is one of the primary criteria based on which banks sanction loan to customers. The loan amount you are eligible for depends upon the quantum of your annual salary.
- Are long-term loans only granted to individual customers?
Ans: No. Long-term loans can be availed by business customers also for purposes related to the running or expansion of business. The documents required and the eligibility criteria will however slightly differ for business customers.
- How does the rate of interest on long-term loans compare against that for short-term loans?
Ans: Long-term loans generally offer lower rates of interest as compared to short-term loans. Also, long-term loans like housing loan may offer the choice of fixed or floating rates of interest to customers.
