For loans, financial institutions distinguish loans based on their maturity. Short-term loans have a term of up to two years. If the term is up to four years, then these loans fall under the category medium term loans. What’s beyond are long-term loans. Long-term loans can have a term of up to ten years. Typically, these long-term loans are used to buy or build a property. This practice has changed in recent years. A conventional installment loan can also have a term of ten years.
What is the benefit of a long-term loan?
Having a long term also reduces the monthly rate. In this way, financing could be possible that would not have been possible with medium-term financing due to the non-payable installments. However, it should not be forgotten that a long term also entails a longer interest burden. An ordinary installment loan usually has terms of 12 to 72 months. Meanwhile, it has come into fashion, even for relatively small loan amounts to offer long-term loans. Previously this was reserved only for real estate loans.
Even today, long-term loans are usually applied for to purchase a property. A term of ten years, however, should not obscure the fact that the loan is then fully paid. On the contrary, because usually a follow-up financing is needed. It is quite rare for a real estate loan to be fully paid off after just ten years. That would require a high equity.
Loans with a long term should be chosen wisely. Every now and then it happens that a borrower comes to money. What could be more natural than to pay the loan prematurely in these circumstances? Often this wish fails because of the conditions of the banks. Many do not like to see a loan taken out before maturity. The banks are escaping interest. For this reason, not a few financial institutions charge fees for early redemption. This is called prepayment penalty. If you are looking for long-term loans, you should make sure that these fees are not required. There are enough banks that have abolished this practice. A long-term loan ties you to the bank and interest rates. But that does not mean After ten years, follow-up financing must be requested from the same bank. In the meantime, a lot has changed and the offers at other financial institutions could be cheaper.
For the consumer, a long fixed interest rate has the advantage of securing a favorable interest rate level over the term. But it can also happen the opposite. The interest rates could fall again. Longer-term loans should really be chosen only when there is an absolute low interest rate. Of course, property loans are excluded. The consumer has no choice but to opt for long terms. Otherwise, the monthly installments would not be payable. Choosing a long term on conventional installment loans is a risk. Therefore, a free special repayment option is so important.