Long-Term Personal Loan: Pros and Cons

Pros & Cons of Long-Term Personal Loan

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What are Long-Term Loans?

Long-term loans are those which, as the name suggests, are repaid over a longer tenor. Their repayment tenors may well be as long as 30 years and they could be secured or unsecured in nature. Loans that are usually paid-off in a time frame of more than 3 years tend to fall under the category of long-term loans. Longer repayment tenors indeed help with the reduction of the EMI amount; however, the borrower’s interest cost also increases.

Long-term loans have proven instrumental in resolving a myriad of financial needs as they can be easily paid-off in significantly smaller EMIs without disturbing the borrowers’ finances. These forms of credit options allow people in need to make the most of the benefits. Long-term loans are typically used to fund milestone moments for the borrower, such as funding of their wedding or that of their child, or expanding their business, or buying/renovating a house.

 What are the Benefits and Drawbacks of Long-Term Loans?

Features of long-term loans can differ as per the type of loan one opts for. Some of the most common features of long-term loans are as follows:

  • Possibility of Availing a High Loan Amount: Long-term are generally taken for accessing high loan amounts and are mostly secured in nature, unlike the standard personal loans. It is due to this reason why banks do not have to worry much about such kinds of monetary advances as the borrower has already pledged a collateral.

  • High Interest Rates: Long-term loans also typically attract lower interest rates as the borrower has to repay it over the course of many years. But, given that long-term loan amounts are usually high in value, the interest component of the overall payable is bigger in size too.

  • Prepayment: Long-term loans almost always offer the option of prepayment to borrowers so that they can pay-off their loan before the repayment tenor. This saves the borrower a lot of money in terms of the interest amount that they would have otherwise paid. It also frees up a lot of room in terms of the credit utilisation ratio and impact’s the borrowers’ credit score positively. However, it must be noted that prepayment charges/penalties might be applicable.

  • Income Eligibility Criteria: Such loans are sanctioned on the basis of the income status of the applicant. Lenders prefer individuals with a stable source of income as there’s intrinsically a lesser amount of risk attached to them. Some lenders may also ask for a collateral to be submitted with them.

  • Tax Benefit: What is more that the borrowers of these loans can also avail for tax rebates under certain sections of the Income Tax of India Act. Housing loan borrowers, for instance, can get their taxable income reduced under section 24 of the Income Tax Act. Similarly, repayments made towards business loans can be shown as expenses in the books of the firm, reducing the company’s tax. However, it must be noted that the likes of automobile and personal loans are not eligible for such tax benefits.

  • Boosts Credit Scores: When an individual avails a secured form of loan, it impacts his or her credit scores or that of the business positively, but if the same is only repaid timely. Any defaults or late payments, on the other hand, will not mean nice things for one’s credit report, which is why a borrower must ensure timely repayments of such kinds of monetary advances.