Any loan with a tenure longer than 3 years is categorized as a Long-Term Loan. There are different types of long-term loans in the market; home loans, vehicle loans, business loans, personal loans, to name a few. 

A personal loan is one of the easiest to obtain among long term loans. It is unsecured, sanctioned quickly without strict eligibility requirements, flexible repayment tenures and competitive interest rates. Personal loans can be utilized to meet medical emergencies, wedding expenses, vacation plans, higher education costs, or even as top-up loans. 

In the case of long term personal loans, one can get high loan amounts at comparatively lower interest rates. The EMI is also considerably low since the repayment amount is spread over a longer-term. 

If you’re wondering whether you should opt for a long-term personal loan, you’ve come to the right place. In this guide, loan experts from CreditMantri walk you through the pros and cons of long-term personal loans. analyse the positives and negatives, and choose the best option that suits your financial goals. 

Pros of Long Term Personal Loans

1. Lower EMI Amount: Since your repayment tenure is longer, the total outstanding amount is spread over more years resulting in a smaller EMI amount. It reduces the burden on your monthly cash flow allowing you to maintain a good Debt to Income Ratio (DTI). Banks usually have a Personal Loan EMI Calculator on their website. Use it to find the approximate EMI you have to pay on your loan amount every month so that you can plan your loan carefully. 
2. Higher Loan Amount: When you opt for longer repayment tenures, it brings down your monthly Debt to Income Ratio. This ratio, when lower, indicates a healthy repayment capacity for you. This helps you in getting a higher loan amount and better loan terms in the future. Try and utilize the maximum loan tenure, to bring down the DTI, thereby boosting your credit scores.  
3. Prepayment & Part-Payment Options: With longer repayment tenures, you can get prepayment and part-payment options on your loans. It is difficult to give these options on short term loans as the tenure is as such short. Prepayments and part-payments allow you to utilize any surplus funds you may come across during the tenure of the loan. This ultimately reduces your overall interest burden from the loan. 
4. Helps Build Your Credit Score: Your credit score is built through your existing loans and your repayment history. When you have a long term loan, the regular repayments over a considerable period of time enable you to build a strong credit score. Having a healthy credit score opens more avenues for you to avail other loans from banks in the future. A high credit score also helps to secure loans at lower interest rates, thereby reducing your overall loan burden. 
5. Get The Benefit Of Top-Up Loans: Top up loans are usually offered to borrowers who have a long-standing relationship with the bank. It may not be possible to build a strong relationship with the bank when you have a short term loan. But, when you have a long term loan, you have the opportunity to build a loyal relationship with the bank. You then get offered various offers and upgrades on your existing loans. You may be offered a top-up loan on your existing loan that may come in handy for any long-planned expenses. 

Cons of Long Term Personal Loans

1.  Higher Repayment Amount: Though you get to pay a lower EMI, the overall amount you repay to the bank will be considerably higher. Since you have a longer tenure, interest is charged for all these years, resulting in a higher interest amount and overall higher amount to be repaid. This is a waste of your resources that could have been redirected to better purposes, like investment or savings.  
2. Being Tied To A Long Term Liability: As you choose a long repayment tenure, you have to be committed to the loan for a long period too. This may make you feel burdened over the years. You have to constantly budget your finances to ensure that the EMIs are paid on time. This may cause mental stress at some point in time. 
3. Stuck with a higher interest rate for a long time: Personal loans come with a fixed interest rate. When you opt for a long repayment tenure, you may not be able to take advantage of a lower interest rate that may come into effect at a later date. 
4. Lowers your eligibility for other loans: A person’s loan eligibility is calculated on the repayment potential. As long as you repay a debt, as you have a set commitment on your ongoing loan, your loan eligibility for new loans is reduced. Generally, lenders prefer borrowers who do not have several ongoing debts. They check if the monthly sum payable for loans does not exceed more than 50% of your monthly net income. Having a long-term personal loan means a longer debt commitment, which reduces your eligibility for other loans. 

Verdict

Long term personal loans are a good option if you don’t have plans to take another loan in the next 3 to 7 years. An existing loan can hamper your eligibility for other loans so it is better to choose a long term personal loan if you don’t plan to get another loan in the near future. Long term loans are also a good option for people who need a higher cash flow every month and can afford only a lower EMI amount every month. 

If you plan to take a bigger loan in the next few years, then it’s a good idea to stay away from long-term personal loans. Instead, look at alternatives to long-term loans like a credit card with a high limit or overdraft facilities that allow you to avail revolving credit facilities, as and when needed.