Man looking over the details of long term personal loan.

Long-Term Personal Loans: Higher Interest Rates Vs. Longer Terms

Cathie Ericson8-Minute Read
September 24, 2021

You may be familiar with a personal loan as a way to help ease your debts. These loans help you by consolidating multiple credit cards and other bills into one loan that will help you pay off what you owe in a short time frame.

But there is another option that might be the right answer for your needs – a long-term personal loan.

What Is A Long-Term Personal Loan?

A long-term personal loan is an unsecured loan that has an extended repayment period, usually up to 7 years. Some lenders will offer up to 10 years for this type of installment loan, depending on the borrower’s credit history.

This type of loan can be a good way to handle your debts if you need flexibility from a lender and prefer lower monthly payments. But you need to be aware of how they work to ensure they are the right choice for your situation.

How Long Are Personal Loan Terms: Short-Term Vs. Long-Term

As mentioned, there are two types of personal loans: short-term and long-term. While the basic premise for these two types of personal loans is similar, they have different term options and interest rates.

Here is more information to help you compare them to see which one might be right for you.

Short-Term Personal Loans

A short-term loan is the more common type of personal loan and typically has a time frame of 12 months or less during which you will repay the amount you owe.

Short-term loans are appealing if you need money for a quick and sudden need. Common loan purposes include unexpected house repairs, moving costs and medical bills.

Long-Term Personal Loans

Unlike short-term loans, a long-term loan can last up to 10 years. Long-term loans can have many of the same loan purposes as mentioned above, such as a home remodel or a medical cost, especially if the sum that you need is large. They can be appealing because the monthly payments for a long-term loan tend to be smaller and more manageable.

These loans are guaranteed using your own personal credit history so if you intend to use it for a business purpose, you might opt for a business loan, such as an SBA loan from the Small Business Administration. Those loans may come with more attractive terms than a personal loan. Make sure to talk to your banker about which option is best for you.

Since you’ll be getting the loan for a longer period of time and chipping away at it in shorter increments (making smaller monthly payments to the lender over time), it can be harder to get a long-term personal loan since it’s that much longer a lender is waiting for payback.

The Pros And Cons Of Using A Long-Term Personal Loan

As with any financial vehicle, there are going to be some advantages and disadvantages of using a long-term loan. Make sure you understand the product and its implications to your financial wellness completely before you decide to apply for one.

Pros

While you should never accrue debt without a clear plan for how you will manage it, sometimes it’s inevitable that you need to borrow some money to pay off a large or unexpected expense. Here are some of the advantages of a long-term personal loan, especially compared with some other financial products.

  • Larger Loan Amounts

Since you’ll be paying it back over a longer period of time, it’s possible to borrow a larger sum of money compared with a short-term loan. That can make it attractive for bigger needs, such a tuition or a major home remodel.

Lower Monthly Payments

Even though you are borrowing a larger amount of money, payback is spread over a longer time period, which helps keep the monthly payments lower and easier to fit into your budget.

Improved Credit Score

While getting a loan can cause a temporary ding as the lender “pulls” your credit, making full and timely payments – and then paying off a long-term personal loan – can improve your credit score as a borrower. It also can burnish your credit history and make you a more attractive borrower for future loans, which is something to keep in mind if you believe you want to obtain other loans down the road.

Cons 

Long-term personal loans still have drawbacks. Here are some of the disadvantages of using a long-term personal loan that you should take into account before making a decision:

Higher Interest Rates

When you borrow money for a longer time, you end up paying more interest over the long run. That’s especially the case for long-term personal loans, which typically have higher rates than shorter-term loans. In general with loans, the longer the term, the higher the interest rate. Over time, you may be able to refinance the personal loan to lower your interest rate and save you money.

Fewer Lenders To Choose From

Any time you choose a financial product, it’s important to compare rates, terms and even service to make sure you’re using the provider that’s right for your situation. However, that can be harder to do with a long-term personal loan as fewer lenders offer them. Less competition can lead to higher rates.

More Challenging To Get

Not only are there fewer lenders, but the lenders there are will scrutinize your financials more closely. Most people who are able to secure a long-term personal loan usually have great credit.

Longer Repayment Terms

While this is also a benefit since it helps you better manage your monthly bills, a longer repayment term locks you in when you don’t know what your financial future will look like down the road. If circumstances change – say, you lose your job or grow your family – it might be more difficult to pay off a large long-term loan, which could put your credit score at risk.

That also means you could end up paying a lot more interest over the long run. Wondering what these costs entail? We ran some calculations using the Rocket LoansSM calculator to illustrate some of the differences.

Loan Type

Loan Amount

Term Length

Annual Percentage Rate

Monthly Payment

Total Interest Paid

Total Amount Paid

Short-Term

$15,000

36 Months

11%

$491.08

$2,678.91

$17,678.91

Long-Term

$15,000

72 Months

11%

$285.51

$5,556.81

$20,556.81

Note that the annual percentage rate (APR) is the same, as is the loan amount, yet the total amount paid is nearly $30,000 different. Of course, the payment you are making is also far more manageable each month, but if you stretch out the repayment terms of the loan for double the amount of time, there is that much more time for interest to accumulate.

Not only will you pay a lot more over the long term, but it also can be harder to predict where you will be financially in that more-distant future, making this type of loan not only more expensive but also potentially more risky.

Where To Find The Best Long-Term Personal Loans

If you have done the math and feel confident that a long-term personal loan is a good fit for your financial situation, you should start shopping around to various financial institutions that offer long-term personal loan options. It’s always wise to do ample research to compare amounts and terms before committing to one.

Banks

Banks are one of the most common lenders, and if you’re already a customer or borrower, they may offer better incentives than other places. They also will prioritize customers with a good FICOScore, possibly even offering a better rate.

Credit Unions

Often credit unions and banks are lumped together since they both offer similar products, but they have a key difference that’s important to note. Banks are “for profit” institutions and credit unions are nonprofits, as well as often having some sort of commonality among its members, such as living in the same place or working for the same industry.

As a nonprofit, they might be more likely to provide better terms. While you may not be able to get a personal loan from just any credit union, it can be a great option if you qualify since they often offer lower interest rates and more flexible terms to members than they could get at a bank.

Online Lenders

Do an online search for personal loans, and dozens of online lenders will pop up. Many would-be borrowers opt for this route because it’s so convenient. However, it’s important to remember they may not all be legitimate. If you want to do business with an online lender, carefully consider their credentials and read the fine print to make sure you’re clear on the terms and specifics before applying.

How To Get A Long-Term Personal Loan

Ready to look into a long-term personal loan? There are several steps needed to receive a long-term loan.

Step 1. Calculate the desired loan amount. It’s best to have a specific sum in mind that will cover exactly what you need it to, so you’re not tempted to spend the money on frivolous items just because it’s there.

Step 2. Compare lender interest rates and terms. Get several quotes so you can make sure you’re getting the best available terms. Don’t forget to include all the other costs, such as an origination fee, in your calculation.

Step 3. Run a free credit report. Knowing your credit situation can help you avoid sticker shock. If you don’t have excellent credit. you might want to consider waiting until you’ve polished it up a bit; to get a lower interest rate, you’re going to need an impressive credit score.

Step 4. Get prequalified with the chosen lender. They’ll ask numerous questions to ensure you have the financial wherewithal to eventually pay them back.

Step 5. Complete the application process. Your lender will let you know what you need to provide. You’ll need to include basic information as well as bank statements and other financials.

Alternatives To Long-Term Personal Loans For Bad Credit

Of course, long-term personal loans aren’t the only option out there. If you have poor credit and aren’t sure you will be approved, you can take other steps to secure the funds you need to borrow.

Home Equity Line Of Credit

A home equity line of credit (HELOC) is a line of credit based on the existing equity you hold in your home. This can be a good option if you have amassed a significant amount of equity. It works much like a credit card; however, since the lender is using your loan as the “asset” that you are borrowing against, they can feel more comfortable making the loan.

In other words, it is a “secured” loan rather than an “unsecured” loan like a long-term personal loan, which means you might achieve better rates with a HELOC. But your home is collateral, so if you can’t pay the loan, you may risk foreclosure.

Cash-Out Refinancing

With a cash-out refinance you take out a portion of the equity in your current mortgage and start a new mortgage, owing a higher amount. You can use the lump sum to apply as you wish to finance a project or cover a financial emergency. It also can lower the interest rate of your mortgage depending on current market rates.

Credit Cards

Another option you’re likely familiar with is using your credit card to cover an unexpected expense. This can be an easy choice, assuming you have sufficient room on your card, but it also can be risky. First, it can hurt your credit score if it drives up your utilization rate, or the percentage of available credit you are using. Also, since credit card debt is “revolving” debt, it can continue to rise, putting you in a poor financial position as you work to regain control of your finances.

The Bottom Line: Long-Term Personal Loans Should Be Used For Specific Situations

Before getting a long-term personal loan for any potential expense, you should know the loan purpose and your repayment plan. It can be a manageable way to find the money you need immediately while not adding an onerous amount to your monthly bills, but it’s not for everyone.

Consider the possibility of a long-term personal loan carefully, focusing on necessary, large expenses like medical bills, home improvement and debt consolidation.

If you’d like to find out what sort of financing is best for your personal situation, try out your options at the Rocket HQSM Savings Calculator.

Cathie Ericson

Cathie Ericson writes about personal finance, real estate, small business, education, retail/ecommerce and other topics for a host of brands and websites. Her work has been featured on major media websites, including U.S. News & World Report, Forbes, Business Insider, The Oregonian, Industry Dive, Boston Globe, CNBC, MSN.com, Realtor.com and Yahoo Finance, among many others. Find her @CathieEricson.com.