If you are looking for a loan, you have many different types to choose from. Some loans are for short terms and have to be paid back within a year to 5 years. Other loans are long term and can take well over 5 years to be paid back. For example:
Xavier wants to purchase a house. He is looking for a long-term loan that he can pay back in small increments over a number of years. He needs a $100,000 loan and is looking for a loan term of 10 years. If he is approved for this loan, will this be better than a short-term loan that he has to pay back within a year?
Well, the answer is, "Maybe." It really depends on the interest rate, his income, and his budget. Depending on a person's financial situation, long-term loans can be better than short-term loans, and vice versa.
The benefit to a long-term loan is that your monthly payments will be lower than payments on a short-term loan. This is because the principal is split over many more months than a short-term loan. For example, paying back $100,000 over 12 months (not counting interest) results in monthly payments of approximately $8,333.33; whereas paying that same amount back over a period of 120 months (not counting interest) results in monthly payments of approximately $833.33.
Of course, interest is always a factor when it comes to loans. A long-term loan will result in the borrower paying back more in interest fees. For example, a borrower will pay an additional $2,480 on a $10,000 loan with a 15% interest over 3 years. That same loan, if it was a 10-year, long-term loan, would require the borrower to pay roughly $9,360 in additional interest fees over that span, nearly 4 times more! Remember, the longer a loan lasts, the longer you are in debt and the more opportunities you have to accidently miss payments.
So, before ever deciding on a long-term loan, always look at your budget and your income to see if the loan is right for you.
In summary, long term loans can be beneficial if you need to borrow a large amount of money that can be repaid in smaller increments over a very long period of time. However, since they are most likely to cost you more in the long term because of interest, it is a good idea to consider alternate loans that may be less expensive and may be better for your own personal financial situation.
Question
Should someone with financial instability get a long-term loan?
No. Since long-term loans can last 10 years or more, it is better to take out one of these loans when you have stability with your finances. If you are able to budget and plan your finances over the 10 or more years that you have a long-term loan, then the long-term loan would be most beneficial to you.
