Long-Term Loans

Long-term loans are available across nearly all categories of debt solutions. On the basis of their tenure and purpose, here’s a look at these loans across different debt segments:

• Home Loans: This can be considered as the most appropriate example of long-term loans. The tenure of home loans goes far beyond 3 years. Usually, it goes up to a period of 15 years to 20 years and in some cases even up to 30 years. The house or the apartment acts as a security until the loan is paid-off. The long tenure of repayment is usually because of the high loan amount. Home loans are sanctioned for an amount ranging from Rs. 1 lakh to Rs. 3 crore. Because of the high loan amount, the borrowers can opt for a sufficiently long repayment period so that they can have reasonable EMIs and the chances of default are reduced to a minimum level. 

• Education Loans: These are the loans offered to students. The loan covers the tuition fee of the applicant along with other necessary expenses required for and after the completion of their studies, students are given a time period to find employment and start repaying the loan.
  The repayment period of such loans are usually higher in case of medical and engineering students as the tenure of such courses is already long. These loans are offered for both national and international study programmes depending on the requirement of the applicant. For engineering and medical students, the loan amount is higher due to high cost of studies as well as the better chances of success in finding a job in these fields. Nonetheless, students and guardians should take note that the given amount of loan and interest rate usually depends on the policy of lending institution, and some banks may offer higher amount of loans even for regular programmes if the institution is well-known. 

• Vehicle Loans: These are the loans provided for purchasing cars and two-wheelers. Car loans have seen huge demand in recent years. The number of applicants and borrowers has also significantly increased in the last decade. This is because of increasing purchasing power and improvement in the lifestyle standards of people. This loan can be put in the category of long-term loan because car loans of amounts as high as Rs. 10 lakhs or more require repayment over a period of at least 3 years.
  Cars are considered as a luxury and thus the interest rates are usually higher on these loans than others. However, increasing competition in this sector has pushed banks to lower their rates of interest and increase their tenure. A typical tenure of a car loan can be up to 7 years which is fairly sufficient for the borrower to repay in easy installments. 

• Personal loans: These loans are usually unsecured loans that are offered for covering the personal expenses of the borrower. Borrowers do not need to keep anything as collateral in these loans as they are granted these loans according to the past credit behaviour and financial capability of the applicants. The reasons to avail a personal loan might be different for different borrowers. People can take a loan to go on a vacation, cover the wedding expenses, or to set up a small business unit.
  The tenure of personal loans is usually less than the home or education loans but they may also be up to a period of 5 years, which is usually the maximum tenure in case of personal loans. Most personal loans can be customized. This means that the borrowers can choose their repayment period and most applicants prefer to choose a period of 3 years or more that allows to keep their EMI amounts low. 

• Small Business Loans: These loans are offered to both businesses and individuals. Small business loans are offered by all the major public and private sector banks in the country. These loans can be sanctioned for purchasing new equipment, expanding a business or for setting up a small business unit. The tenure of such loans depends largely on the loan amount. And in most cases, the loan tenure is more than 3 years and may go up to a period of 10 years. This makes small business loan a suitable long-term loan option. 

• Long-term Payday Loans: Payday loans are small loans that are offered with high interest rates on the condition that the borrower is liable to pay the loan as soon as he receives his wages or salary. Such loans can also be long-term loans in situations where the borrower is going to receive income in longer intervals or borrower has chosen to repay the loan in small instalments over a substantial period of time.

Some features of long-term loans are explained here:

• High Loan Amount: Long-term loans are given for high loan amounts and are mostly secured in nature except for standard personal loans. Hence, banks do not worry much about such loans as they already have collateral that has the same value as the loan amount.

• Low Rates of Interest: Long-term loans are offered on low interest rates because the borrower has to repay the debt over a long period of time and the banks also make their profits in the form of interest over such long tenure.

• Repayment and Prepayment Options: Long-term loans come with a number of repayment and prepayment options. Borrowers can pay the EMIs through ECS (Electronic Cancellation System), AD (Auto-Debit), cheque or cash. This makes it easy for the borrowers to repay the loan as per their convenience.
  Borrowers have the option of prepaying the loan before the completion of the loan tenure. This way, they can save a lot of money in the form of interest, which they would have to pay otherwise. However, some banks charge a nominal rate of penalty on prepayment but it is much lower than the actual rate of interest.

• Tax Benefit: Some long-term loans come with tax benefits. Long-term loans such as home loans are eligible to reduce the taxable income under the Income Tax Act. Similarly, business loan repayments can be shown as expenses in the account and help arrive at the actual profit, and thus, reduce the company’s tax. However, some loans such as car loans or personal loans are not eligible for such taxation benefits.

• Requirement of Collateral: Long-term loans require security or collateral except for standard personal loans. This is because the loan amount is usually high and the banks want to ensure that the borrower shares the same amount of risk as them. And they can recover their losses in situation of a default. The presence of a mortgage or a hypothecation greatly increases the chances of successful and timely repayment.Also Read: How to get Collateral Free Business Loans?

There a number of questions which may come in the mind of applicant before applying for the personal loan, listed below are few of the commonly asked ones:

Q. Why are long-term loans better than short-term loans?

A. Long-term loans are better than short-term loans as they correspond to lower EMIs. They do not push the borrower to repay the loan in a short span of time. This does not put excessive stress on the borrower’s overall budget as well.

Q. What is the role of income of the applicant in securing a long-term loan?

A. The regular income of any applicant plays a major role in securing long-term credit. Having sufficient work experience and regular job ensures that the applicant is likely to progress professionally in the future and he / she would be able to afford the EMIs as per the loan amount. Also, banks have to assure themselves that the borrower is financially capable of repaying the loan and as such, they require necessary information from the applicant about his / her work and monthly income. In addition to proving the applicant’s repayment abilities, a regular monthly income also plays role in deciding the quantum of loan. 

Q. Are long-term loans only sanctioned to individuals?

A. No, long-term loans are sanctioned both to individuals and businesses/companies. Both the individuals and the businesses might need a loan for personal reasons or for expanding and setting up a business. Banks understand this aspect very well and offer long-term loans to both individuals and businesses. 

Q. What is the difference between the interest rates of long-term and short-term loans?

A. One can easily see a significant difference between the interest rates of long-term and short-term loans. Long-term interest rates are lower than short-term loans. RBI (Reserve Bank of India) has provided clear guidelines on various aspects of loans given by banks. Factors such as the interest rate, loan amount, and EMIs usually are defined in line with these guidelines by the lending bank.