Long-Term Bank Loans: Advantages & Disadvantages

Long-Term Bank Loans: Advantages & Disadvantages
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Available to both private individuals and small and large businesses alike, long-term bank loans provide a source of funding for considerable purchases or business expenses that the borrower must pay off over a period of years rather than weeks or months. When considering taking out a long-term loan from your bank, weigh both the advantages and disadvantages of doing so before signing on the dotted line.

Purchasing Power

Because a long-term loan’s repayment period spans a greater period of time than a short-term loan's, you can borrow a greater amount. Borrowing more money from the bank gives you far greater immediate purchasing power than borrowing a small amount and saving up the remainder required to make a large purchase. This is particularly beneficial for businesses that need an influx of cash quickly to stay afloat.

Qualification Requirements

Long-term bank loans require applicants to meet strict financial and credit criteria that are not always necessary with short-term loans. The application process is often lengthy and the applicant must prove his ability to repay the loan through thorough financial documentation before the bank will consider approving the application. Depending on the type of long-term loan an individual or business applies for, the bank may require collateral in the form of a security interest in the applicant’s assets. Should the applicant fail to repay the loan, the bank may then seize the asset by calling due its security interest.

Lower Payments

A long-term bank loan provides an applicant with lower payments than a short-term bank loan for the same amount. Thus, while the applicant could feasibly pay off her liability more quickly with a short-term loan, the lower payments she enjoys via the long-term loan make incorporating loan payments into her budget an easier task. Barring interest charges, a short-term bank loan of $10,000 repaid over a six-month period leaves the borrower with payments totaling over $1,500 a month. A four-year bank loan for the same amount, also barring interest, leaves the borrower with more manageable payments of approximately $200 a month.

Interest Charges

Interest rates vary depending on the type of loan the applicant applies for and whether the applicant meets the bank’s qualifications for the best rates. What does not vary, however, is the fact that the longer the loan term, the more interest the borrower pays over the life of the loan.

In general, interest rates are slightly higher for long-term bank loans than for short-term bank loans. Borrowers can often reduce their interest rates by providing the bank with collateral. This reduces the bank’s risk of loss and allows the borrower to take advantage of lower rates.