3 Key Things to Know About Long-Term Loans

Melinda (Milli) Haine Melinda (Milli) Haine | Loan Underwriter

When a consumer needs cash to finance a sizeable purchase, there are several options: raid the savings account, use a credit card, or start looking at long-term loans. By 'long-term loans' we mean those taken out for several years as opposed to a payday loan, which is typically extended for about 7 to 10 days. Borrowing on a long-term basis is certainly more economically sound than a short-term high-interest loan.

A typical long-term loan will come in the form of either a personal loan or secured loan. Personal loans are used to finance amounts between £5,000 and £15,000; secured loans are for amounts of £15,000 or more. If you are planning to take out a long-term loan in the near future, there are three key things you need to know first.

Your Credit Rating Matters

Every loan comes with an interest rate and repayment terms. Obviously, the goal is to borrow as little as necessary and pay it off as quickly as you can. This is made easier when you have a relatively decent credit rating. Consumers with the best credit tend to get offers with the lowest interest rates and the friendliest terms. Those with poor credit have just the opposite experience.

It might be helpful to check your credit rating before you start applying for long-term loans. A poor rating would be a good reason to hold off on borrowing as long as you possibly can. In the meantime, repairing your credit would be a priority.

It Might Be Cheaper to Borrow More

Although it might seem contrary to common sense, it might be cheaper to borrow more money in some cases. Money Saving Expert provides an excellent example of how this is possible. Say you are looking at borrowing £4,999 at 6.8% for five years. With monthly payments of £99, you would repay a total of £5,911. But that same lender is offering an interest rate of 4.3% on loans of £5,000 or more. Just by borrowing one pound more, the lower interest rate over the same five-year term would result in a total repayment of £5,566.

It boils down to knowing what the thresholds are for interest rates. If the amount you want to borrow is right near the upper edge of a threshold, it could be cheaper, in the long run, to borrow enough to go over that threshold.

Beware of Representative Rates

We have discussed the idea of representative rates numerous times in the past, but it bears repeating. The rates lenders publish online and through other forms of marketing are known as 'representative rates' because that is just what they are: they are representative of what you might be offered. Yet those rates are not the rates offered to every loan applicant. In fact, lenders are required by law to offer representative rates to only 51% of applicants. Everyone else is likely to get a higher rate.

Never assume an advertised rate is the rate you will be offered should your loan application be approved. It is far better to assume you will be offered a rate at least a percentage point higher than the representative rate. Assuming a higher rate makes it easier for you to determine how much you can borrow based on your budget.

Long-term loans are an excellent way to finance large purchases when you do not have the cash on hand. But as with any kind of borrowing, it pays to take the time to do plenty of research beforehand. The more you know, the better deal you can get.

Sources:

  1. Money Saving Expert ?? http://www.moneysavingexpert.com/loans/cheap-personal-loans

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