Types, Advantages And Disadvantages Of Long – Term Loans

Long-term loans are all types of loans that have the repayment period over one year. Long-term loans come in many forms, but there are three most common types: term loans, mortgages and leasing.

Term loans

Term loans are all long-term loans with the repayment period longer than one year. These loans are those used by both small businesses and large companies when they need to invest in business development and growth. Such investments usually include buying the necessary machinery or equipment, buying or building new facilities or adapting the old ones. When a company gets a term loan, they generally invest it into something that can bring them additional income over the following years. So that they can both repay the debt and earn money in addition to it.

 

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Mortgage

Mortgage is a long-term loan which is secured by a real estate property such as a house or a flat. This means that, in case the borrower fails to repay the loan, the lender has the rights to confiscate the property and sell it in order to repay the debt. This type of loan is most commonly used by individuals when they want to buy a home.

 

Leasing

Leasing is a loan agreement where the borrower is allowed to use a certain asset without having to pay the full sum for it. Rather than paying for the asset, the borrower pays for renting it and using it. This basically makes leasing a rental agreement, but there is an important difference – once the leasing agreement expires, the borrower can buy the asset on reduced price and take the full ownership over it. This type of agreement is common for buying machinery for certain businesses, and when it comes to individuals, it is sometimes used for buying a car.

Long-term loans

Long-term loans are generally considered as more risky for both the borrower and the lender. Since the repayment period is long and many unexpected situations may occur. This is why the lender usually requires the borrower to pledge a certain asset as a collateral, so if he cannot repay the debt, the lender will repay it by selling the asset. Credit rating is thoroughly checked for every business and individual before the loan is granted, since the lender needs to make sure that the borrower is highly likely to be able to repay the debt.

The advantages of long-term loans are many. They are generally more stable than short-term loans, in terms of the interest rate and the amount of monthly installments. Since the repayment terms are longer, the installments are usually not too high and it should not be too demanding to pay them. Then, long-term loans require less maintenance and monitoring than many short-term loans. Lastly, they are flexible, and an agreement such as leasing offers the borrower to use the asset as long as he needs it rather than buying it.

However, there are also some disadvantages of long-term loans. They can have expensive interest charges, but it depends on the offer, purpose of the loan and many other conditions. They require a lot of information you need to give the lender in order to be taken into consideration for a loan. Also, your credit rating and financial report need to be practically ideal in order to be granted a loan.

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