A loan with a long term is common in the context of mortgage lending. But private installment loans can also be taken out with long terms. Consumer loans are usually considered long-term if their term is more than five years.
This classification is not required by law; there are legal peculiarities for terms of ten years or more. After a period of ten years, the borrower can terminate a long-term loan without the lender being entitled to demand prepayment penalty. Not every bank grants loans of any length apart from real estate financing, most financial institutions limit the term of installment loans to five to seven years. Accordingly, fewer lenders are available for long-term loans than for loans with shorter terms.
Advantages and disadvantages of a long-term loan
The longer the term of a loan, the lower the monthly repayment installments. For this reason, credit customers with a rather low income often receive a long-term loan, even if the bank has to reject a loan with a shorter term due to the excessive financial burden on the borrower. Long-term loans, with the exception of the traditionally long-term real estate financing, usually have the disadvantage of high loan interest rates.
These can be reduced by a careful loan comparison, and many lenders also take into account the improved creditworthiness of their customers when setting interest rates in view of the long loan term and the associated low rate payments. On the other hand, long-term loans are subject to a higher risk of default, which means that some lenders make it mandatory to take out credit default insurance if the financed good cannot be used directly as collateral.
What to look out for with long-term loans
Anyone who takes out a loan with a long term naturally pays particular attention to the effective annual interest rate, which provides information about all the costs associated with taking out a loan. The nominal interest rate, which is also given, must also not be disregarded for a loan with a long term, because this is decisive for the recalculation of the interest when the borrower uses flexible loan terms.
Agreeing on the greatest possible flexibility is essential, especially for long-term loans, since the life situation of the credit customer can change at any time. It is therefore useful to be able to make flexibly increased payments and, if necessary, to reduce the repayments or to suspend them at a rate. Almost every bank accepts such changes in long-term loans as a case-by-case decision, but some banks charge high fees. In any case, it is cheaper for the borrower if the options for free flexible repayment arrangements are agreed in the loan agreement.
Variable interest rates on long-term loans are generally not advisable, since the development of interest rates over a long period of time cannot be predicted. Ideally, the useful life of the item financed with the long-term loan does not exceed its term, since in other cases it is likely that a replacement will be obtained and the need to borrow again before the existing loan is repaid.