Top 3 Things to Know about the Cheap Long-Term Loan

Michelle Tuvey Michelle Tuvey | Loan Underwriter

Across the UK there are property owners contemplating getting a cheap long-term loan to finance home improvements, take a trip, buy a new car, or even supplement a child's university education. Cheap long-term loans are made possible by offering the equity in one's property as collateral.

As with any financial product, long-term loans come with defined terms and conditions that borrowers need to understand before they sign. If you are planning to apply for a long-term loan, do you know how they work? Do you know how to figure out the total cost of borrowing? These are but two questions you need answers to.

Here are the top three things to know about the typical cheap, long-term loan:

1. Term Length Affects Monthly Payments

Regardless of the kind of loan, there are only two ways to make it cheap. Either keep the interest rate low or extend the term. Therefore, the first thing you need to know is that term length affects monthly payments. The longer the term, the less you will pay every month.

Let's say you take out a long-term loan with a 15-year repayment term. Your neighbour takes out a loan for the same amount but with a 10-year repayment term. Whose monthly payments do you think will be higher? Obviously, your neighbour will pay more because he has less time to repay the same amount of money.

Note that longer terms are not necessarily in the best interests of borrowers. Longer terms mean more interest paid, which leads us to the second thing you need to know.

2. Interest Adds to the Cost of Borrowing

Lenders make their money by charging interest. Without the ability to make a profit, there would be no incentive for them to loan money to consumers. What must be understood is that interest is calculated on an annual basis but applied to every monthly payment. Therefore, extending the length of the term also increases the amount of interest paid.

The overall result is that interest adds to the total cost of borrowing. You may pay less per month on a cheap long-term loan because you have 10 or 15 years to pay it, but you are also going to spending more by paying interest for the longer term.

The total cost of borrowing is something that consumers tend not to look at fully. For many, it's a matter of finding a loan product they can afford on a monthly basis regardless of how much it will cost in the long run. Still, understanding the total cost of borrowing is a big part of getting the best loan deal.

3. Cheap Loans Often Include Early Repayment Penalties

There are times when lenders offer cheap long-term loans with lower than average interest rates. They do so with the knowledge that they will make up for the lower rates by way of longer terms. As such, these loans often come with early repayment penalties.

Anyone planning to start shopping for a cheap long-term loan needs to be aware of this issue. Even if a borrower has no plans to repay early, circumstances change. It could be that a borrower finds he has more disposable income in the future than he had planned, income that he wants to use to repay his loan early. A loan with an early repayment penalty may be one not worth repaying early if the penalty is too high.

Now you know the three most important things you need to know relating to cheap, long-term loans. If you're planning to borrow, borrow wisely.

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