In the personal loan market, “long term” is relative.
Sometimes called signature loans, personal loans are consumer loans typically provided by a bank, personal loan provider or other consumer loan company – with no collateral or security requirement.
An unsecured loan is a loan where no additional collateral is required to be pledged to the lender as a requirement to secure the loan. By contrast, secured loan is a loan where an asset is pledged to the lender as part of the loan agreement – such as a car loan or home mortgage financing.
One variation of the personal loan is the payday loan. Also called cash advance or paycheck advance loans, these are very short-term loans that typically require full repayment by the next regular paycheck the borrower receives or within 30 days. With lender approval, eligible payday loan borrowers may be able to extend their repayment period into the next months.
The traditional signature or personal loan is an unsecured loan, typically repaid in weekly, biweekly, semi-monthly, or monthly installments.
Personal loan terms and features
Typical personal loan terms range from as short as three months to as long as five years (60 months). They can actually be longer than 60 months and shorter than 90 days, because each bank or lender is free to set their personal loan terms according to what works best for their risk and lending models – and what is required by the states.
In the context of traditional personal loans, however, long-term personal loans tend to be those with a repayment period of at least three to five years (36 to 60 months).
A long-term personal loan can be used for almost any legal purposes, just as with short-term and mid-term loans. Common approval requirements for long-term personal loans are also essentially the same as short-term loans – although some lenders may require different credit requirements for longer term loan.
Personal loan lenders typically conduct a verification of employment and income, a brief credit review and confirmation of an active checking or savings account. They will also review an applicant’s most recent paycheck stub or bank statements covering the most recent 30-day period to establish sufficient income to service the new debt. The paycheck stub should show not just the current earnings but also the year- to-date earnings of the applicant. The amount of the loan is determined by the lender based upon the verified income of the applicant.
Some lenders do not issue long-term personal loans for those that are self-employed or cannot provide documentation of consistent income. For lenders that do consider the self-employed borrower for a long-term personal loan, the most recent filed income tax return and business bank statements can be provided to establish qualifying income.
The primary benefit of a long-term installment loan is that it stretches out the repayment, typically resulting in lower monthly payments. The additional periodic payments also provide more opportunities to add positive credit entries to the borrower’s credit report, which can help to build or rebuild credit scores.
The down side is that long-term installment loans also incur more months of interest charges, resulting in a higher-cost loan. The additional payments can also mean more opportunities for credit-damaging late payments, particularly for borrowers who don’t set up an automatic payment plan.
With that in mind, borrowers seeking long-term personal loans must always ask whether a long-term loan is right for them.
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