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When are Long Term Online Installment Loans a Good Idea for Personal Expenses?

June 12, 2020 by Daniel Azzoli

right arm of man in striped dress shirt holding Sharpie against surface showing words short term and long term

Next to the amount of the loan along with the charges, the term of your loan is one of the most important details that you should be aware of.

Here at MoneyKey, one of the things we offer are short term installment loans. But in the interest of your financial literacy, we want to make sure you understand what makes them different from long term installment loans.

Find out what they are, when you might use them, as well as their benefits and things to look out for.

 

What is a Loan Term?

The word “term” has a few meanings, but within this context, it refers to time. As in, how much time you have to pay off your loan, provided you make all the required minimum payments when they’re due.

As for installment loans, they may fall into one of two broad categories of time.

  1. Long Term Installment Loans
  2. Short Term Installment Loans

What Are Long Term Installment Loans?

There’s no hidden trick here; long term installment loans are simply loans that have a long term. You generally have a longer time to repay what you owe.

But just how long is “long”? It depends on the type of installment loan you take out, but broadly speaking, we’re talking years, rather than months or weeks. Sometimes, you may even have a term that carries over multiple decades.

If you want a more detailed definition for installment loans, take a look at our resource center where we answer installment loan-related questions in other articles — questions like what is an installment loan and where can you get them?

Examples of Long Term Installment Loans

There is no single type of long term installment loan; there are many. Let’s look at some of the most common ones to see how diverse these loans can be.

Auto Loans

These products help you finance the purchase of a new vehicle and last, on average, 63 months.[1]

Home Equity Loans or Lines of Credit

A home equity loan or line of credit (HELOC) allows you to borrow against the value of your home. The repayment period for a home equity loan is typically five to ten years, while it usually falls between ten and twenty years for a HELOC.[2]

Mortgages

Most mortgages offer 15-year or 30-year fixed terms, giving you multiple decades to pay off the cost of your home.[3] 

silver key lining up to keyhole on small red house with grey roof white doors and white windows

Personal Loans

While an auto loan is for a vehicle, and a mortgage is for a home, the purpose of a personal loan can be a little more flexible. Out of all the loans in this list, personal loans give you the most leeway in what you may use them for. As a result, your terms vary greatly, depending on what you’re using them for. Broadly speaking, the terms range between 12 months to a few years.

Student Loans

As tuition costs continue to rise, student loans have become an increasingly essential step towards affording a secondary education. Standard repayment terms for both private and federal loans are 10 years, but it takes the average person twice as long with 21.1 years.[4]

The Pros to Getting Long Term Installment Loans Online

While the loans we discussed above have distinct uses, they do have some overlap in terms of their advantages. Here are some of the potential benefits of turning to long term installment loans online.

1. Greater Borrowing Amounts

Long term products are there to help you with life’s biggest purchases and investments that you wouldn’t otherwise be able to afford on your own. Their principal limits — or, the maximum you may borrow at one time — tend to be higher as a result.

2. Lower Interest Rates

Typically, long term installment loans come with substantially lower interest rates than short term loans or credit cards.

3. Relatively Affordable Payments

Perhaps one of the biggest perks to a longer term is that it allows you to pay for things over several payments. These payments spread out the cost of your principal (plus interest and/or fees) in smaller amounts, so you aren’t paying for everything in one lump sum.

4. Impact on Credit Score

Generally, long term installment loans direct lenders share your payment history with one of the major reporting agencies. This means your loan may have an effect on your credit history, so it’s important to keep to a timely schedule and never miss a payment.

Some Things to Look Out for With Long Term Installment Loans Online

You don’t have to be a regular reader of our blog to know that a list of pros is usually followed by a glance at some of the things you should be looking out for. Let’s take a look at this list for when it comes to applying for long term installment loans online.

1. Interest

Any time interest comes into play, you should be aware that the longer you take to pay back your loan, the more time interest has to build. Although the typical interest rate may be lower than short term loans, the total interest you pay may end up higher simply because of the length of your term. You should also be aware of any other applicable charges.

2. Commitment

Applying for a long term loan is no small-fry decision. Since it may take literal decades to pay off, it may be a part of your budget for a very long time. Even as your living arrangement, career, and family life change, you may still have to pay it.

While it may be hard to anticipate what your budget looks like years in the future, you may get a handle on your cash flow in the here and now with a zero based budget.

Check out our guide to a simple zero based budget to understand how it works. Use it to see if you can afford long-lasting payments before you take on this form of debt.

3. Collateral (or Other Conditions)

Remember those smaller interest rates from our list of perks? Sometimes, you may only qualify for those competitive rates by supplying collateral or applying with a co-signer.

A co-signer takes the responsibility to pay your bills if something prevents you from making timely payments. Collateral, meanwhile, is an asset you pledge against your loan. Long term installment loans lenders may take this asset as payment if you fail to pay what you owe.

two hands holding interlocking white puzzle pieces next to each other in front of white background

In either case, these conditions provide some sort of security to the long term installment loans direct lenders. Collateral or a co-signer is added insurance your lender has a way of receiving their money back.

But in some cases, for borrowers, putting a collateral on the line or being committed with a co-signer may add heaps of pressure to an already stressful situation. Therefore, it’s important to do your research and be aware of the terms before getting involved in such a situation.

4. A Longer Application Process

A lot is riding on the average long term loan. Not only are you dealing with larger sums of money, but there may also be the added step of verifying information regarding your collateral or co-signer. It may take your lender a while to process everything and even longer before you receive your funds.

What Are Short Term Installment Loans?

Big borrowing amounts repaid over multiple years is a long-term investment that may work for large, planned purchases.

But what about those financial emergencies that take you by surprise?

Long term installment loans wouldn’t be the best fit, but short term installment loans might be an option. But how do they differ?

It’s simple: you pay off these short term loans relatively faster. While they’re still installment loans — in that, you spread out your loan repayment over multiple payments — you simply have less time to pay it all back. Sometimes, you may get some weeks and sometimes, you get a few years.

There are fewer varieties of short term installment loans than long term installment loans. Generally, they’re designed for unexpected emergencies. You may generally turn to this kind of financing for help covering surprise auto repairs or medical bills.

Paying for planned purchases with short term installment loans, on the other hand, would not be recommended. Cosmetic renovations, vacations, and education costs are examples of situations where you shouldn’t borrow cash with short term loans.

The Pros to Getting Short Term Installment Loans Online

That being said, there are legitimate reasons why borrowers may turn to short term installment loans online, and it may be because of these benefits.

1. Faster Application Process

Nowadays, you may apply for your loan online, straight from an online lender’s website. As long as you have your financial information handy, you can make quick work of this application. You may even hear word if you qualify within minutes. If you’re approved, you may receive your funds as early as the next business day.

2. Commitment for a Shorter Period of Time

As long as you can follow them, shorter terms mean you won’t have to carry your debt for a long time, such as decades. Repaying your loan over a shorter timeline will help you pay off your loan faster.

3. Collateral Not Required

Short term installment loans can sometimes be a type of unsecured personal loan. This means you don’t have to pledge collateral be approved. Your approval relies on your creditworthiness and other requirements of the lender.

4. Available with Bad Credit

If your creditworthiness poses a problem with traditional banks, you may be able to find an installment loans direct lender that approves your application despite your bad credit history. While they may ask to check your history, they may also check other financial information to determine if you can afford the loan.

Things to Look Out for When Getting Short Term Installment Loans Online

As with long term installment loans, these shorter financial products aren’t without disadvantages. Find out what they are below, so you may make an informed choice about your finances.

1. Smaller Loan Limits

Short term loans usually come with small principals. This lower amount may be a perfect stopgap when you find yourself just shy of what you need in an emergency. However, they are not made for when you need to make a big, planned purchase.  

2. Shorter Repayment Terms

A shorter repayment period is not always a perk if you didn’t properly budget for your loan. You may feel as though you’re under more pressure because you have less time to pay. Therefore, it’s always important to make sure you are aware of the length of the term before you apply for short term installment loans.

3. Loan Charges

In some cases, interest rates for short term installment loans may vary depending on your credit score. If you’re borrowing with a low score, you may pay higher interest rates and other fees. These may make these cash loans an expensive option, even though there’s less time for these charges to accrue. However, this is dependent on the lender. With some lenders, your credit score won’t affect your rates, but could affect the amount you’re approved to borrow.

woman in oversized necklace and red blazer smiling resting hands on open laptop in front of grey background

Are Long Term Installment Loans a Good Idea?

There are a lot of perks to using long term installment loans. They help you take on expensive, planned personal expenses at relatively lower interest rates.

But, with an equal number of things to be aware of, they may not be the right solution to every financial problem. For unexpected emergencies when you have less time and poor credit, short term installment loans may be up your alley. Just make sure you can handle their shorter repayment schedules and higher interest rates.

Like any financial product, the cash loans we explored here today come with pros and cons. It’s up to you to weigh these against your financial needs.

If you still aren’t sure what sort of loan will help you best, here are 10 questions to ask before you borrow. They walk you through your priorities to help you find the best option for your needs.

But don’t stop there. Take a look through the rest of our blog. There, you’ll find more financial resources that may help you make big decision with less stress.

 


 

[1] https://www.valuepenguin.com/auto-loans/average-auto-loan-interest-rates

[2] https://www.bankrate.com/home-equity/what-is-home-equity/

[3] https://smartasset.com/mortgage/choosing-a-mortgage-term-15-years-vs-30

[4] https://www.cnbc.com/2019/05/23/cengage-how-long-it-takes-college-grads-to-pay-off-student-debt.html


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