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What Are Long-Term Personal Loans And How Do They Work?

5-Minute ReadMay 20, 2022

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Taking out a personal loan generally isn’t a long-term commitment. Ideally, you’ll borrow the amount you need for a purchase or project, and then repay the loan over the course of its term, typically 3 – 5 years (36 – 60 months). Depending on your personal finances, though, you may need more than 5 years to pay back the loan amount.

Some lenders may offer long-term personal loans for instances like this, but while they may give you more time to pay back the loan, they could end up costing you more in the long run. This article will explain how long-term personal loans work, as well as their costly drawbacks.

What Is A Long-Term Personal Loan?

“Long-term personal loan” doesn’t necessarily refer to a specific type of loan, but rather the length of the loan. Whereas most personal loans come with terms up to 60 months, a long-term personal loan is typically one that has a term longer than 60 months. For example, some lenders offer 72-month or even 120-month personal loans. These tend to be harder to find than the more common 36- or 60-month options.

In the world of personal loans, borrowers generally set the terms of the loan’s repayment. You should consider life’s unpredictability, though, before deciding that having more time to repay your loan will benefit your future self.

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Why Are Long-Term Personal Loans Less Common?

Just like you, lenders cannot 100% predict your long-term financial health, or your future prospects. All they know is your financial history.

Think about it. Do you know what your financial situation will be in 10 years? You certainly have goals, plans and dreams, but it is still unknown. You could be making lots of money or you could be struggling, living paycheck to paycheck.

Lenders only make money if you pay back the loan with interest. Personal loans are unsecured, for the most part, and the longer the term of the loan, the more risk the lender is assuming. Responsible lenders don’t want to assume that risk, and lenders that are willing to take that risk want to make sure it is worthwhile.

Do Long-Term Personal Loans Cost More Than Short-Term Loans?

Yes, because the borrower will have to pay more to assure the lender that they’re not a risk, and because they’ll be paying it for a much longer time. Let’s look at some numbers.

Assume that you need $25,000 to consolidate your debt. Now let’s consider how much it will cost you:

Loan Amount*

Term

APR

Monthly Payment

Total Interest Paid

Total Amount Paid

$25,500

36-month

13.26%

$862.39

$5,546.14

$31,046.14

$25,500

60-month

13.26%

$583.60

$9,516.18

$35,016.18

$25,500**

72-month

13.26%

$515.40

$11,608.48

$37,108.48

$25,500**

120-month

13.26%

$384.66

$20,659.55

$46,159.55

*Note: These examples include an origination fee of $500. That amount is paid out of the loan proceeds. This means that to clear $25,000, a borrower would need to borrow $25,500.

**Note: Rocket Loans does not offer 72- or 120-month loans. For the purposes of this example, we used the same origination fee as the 36- and 60- month examples so that we could compare Total Interest Paid on an apples-to-apples basis. Actual origination fees charged by long-term lenders can be higher or lower than $500.

The End Results

As you can see, a 120-month (10-year) term can end up costing you thousands of dollars more than a 36- or 60-month term. That’s money you could otherwise invest toward a down payment on a new home, or a renovation to your current home.

Borrowers can refer to our loan repayment calculator and see how much their monthly payment will be if they pay a loan back over 36 months as opposed to 60 months.

Do Long-Term Personal Loans Cost More Than Short-Term Loans?

Yes, because the borrower will have to pay more to entice the lender into taking the risk, and because you’ll be paying it for a much longer time.

Let’s look at some numbers. Assume that you need $25,000 to consolidate your debt. First of all, that’s a great first step toward putting your finances in order. Now let’s consider how much it will cost you:

Loan Amount

Term

APR

Monthly Payment

Total Interest Paid

Total Amount Paid

$25,500*

36-month

13.26%

$ 862.39

$5,546.14

$31,046.14

$25,500*

60-month

13.26%

$ 583.60

$9,516.18

$35,016.18

$25,500**

72-month

13.26%

$ 515.40

$11,608.48

$37,108.48

$25,500**

120-month

13.26%

$ 384.66

$20,659.55

$46,159.55

*Note: This example includes an origination fee of $500. That amount is paid out of the loan proceeds. This means that to clear $25,000, a borrower would need to borrow $25,500.

**Note: Rocket Loans does not offer 72- or 120-month loans. For the purposes of this example, we used the same origination fee as the 36- and 60- month examples so that we could compare Total Interest Paid on an apples-to-apples basis. Actual origination fees charged by long-term lenders can be higher or lower than $500.

The Bottom Line?

If you choose to take a 10-year term, you will pay $15,113.41 more than you would have had you chosen a 3-year term, $11,143.37 more than if you had chosen a 5-year term and $9,051.07 more than if you had chosen a 6-year term.

Ten years from now, Future You will thank yourself if instead of having just paid off your debt, you have saved over $15,000 that might have gone to your lender but instead will go toward a down payment on a new home, or a renovation to your current home.

What If My Credit Score Isn’t Great?

If you have a low credit score, you may not be able to qualify for more favorable interest rates, and possibly end up with a high APR. Think about how much risk a lender would be taking to give a 120-month loan to a person with poor credit. Most legitimate lenders would pass, even at the highest interest rates.

If that’s your situation, you may be better off speaking to a credit counselor about ways to improve your credit before considering any personal loan.

Being in debt is never fun, regardless of how you got there. The important thing to keep in mind is that the sooner it is behind you, the happier you’ll be.

Think a personal loan might work for your needs? Rocket LoansSM offers personal loans with 36- or 60-month terms. Apply online today to see your loan options.

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