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What is a personal loan?

There are two types of personal loans: secured and unsecured. A secured loan, like a mortgage or an auto loan, is usually not considered as long term personal loan. Even though it is made to the person borrowing the money, it is a secured loan. A personal loan is usually something like a student loan or a consolidation loan, and they are usually unsecured, or not secured for the full value of the loan. Ultimately, the personal loan is a fixed amount of money, repaid for a graded, or ungraded amount over a fixed period of time. The money can come from a bank, credit union or online lender.

Short Term Personal Loans 

In general, a short term personal loan is one where the repayment period is less than one year. The average borrower will find that a repayment period of anywhere under three years is commonly thought of as a short term loan. In financial circles, the short term personal loan is less than a year and is usually a targeted loan for those who are well able to repay the loan on time. 

This is not to be confused with no credit check loans, and one-day payout loans, where the borrower uses a car title or other low-value collateral. While there is a general push for lenders to make decisions on loan applications very quickly, the fact remains anyone who is offering a loan based solely on collateral value or employment stubs, is probably not a company with the highest ratings in customer service. 

Long Term Personal Loans

Long term personal loans are not as rare as many people might think. They are in fact sought after and offered by many borrowers and lenders alike. While the exact definition of long term personal loans is any repayment period over one year in length, the actual common length for long term personal loans is anything over five years. The repayment periods between one year and five years is commonly thought of as the average loan length. 

Common Loan Length References

  • 12 months or less is short term
  • 36 months or less commonly thought of the short term
  • 36 months to 60 months (now commonly 72 months) average loan period
  • 60 (72) months or more is considered long term personal loans
  • 120 – 144 months is no longer uncommon

The Credit Conundrum

In many financial circles, it is believed that the long term personal loans are good for people with bad credit. The loans can be approved even with a low credit score if there is long, consistent employment history. This is actually happening to more and more people, as the scoring requirements for credit ratings are getting more difficult. The range of credit score subtractions and additions has never been greater, as scores are debted larger numbers and credited smaller numbers. A score can be reduced by 100 points for a closed account, and if disputed and shown to be a mistake is only increased 48 to 50 points, instead of a return of 100 points. 

Long Term Personal Loans

On the other hand, if a person pays their credit card on time, but carries a balance that is above 10% of their credit limit, their credit score goes down by 20 points for every 20% the balance is above 10% of the credit limit. These disparities are affecting more and more consumers on a regular basis, causing lenders to rethink their decision-making process. The long term personal loans are a solid fix for these types of credit woes.

Repairing Credit

The long term personal loans can help the people who have low credit scores as well as steady employment and a low DTI Ratio, to increase that low score over time, with less impact on their finances than a shorter loan with a higher interest rate. The long term personal loans are higher overall value, with lower interest rates.

When paid consistently, and on time, the payment schedule can increase overall credit scores a great deal. If the credit cards were paid off using the funds from the loan, then that fact would increase scores substantially. 

That would be especially true if the balances remained below 10% of the credit limit. The 120 – 144-month loans, from $20,000 to $100,000 are a great deal like a mortgage, without equity value. The interest rates will be lower and installment payments smaller, than a shorter-term personal loan and heavy consideration is given to the DTI Ratio, during the application process. 

Debt-To-Income Ratio

One of the most important lender considerations during the application process is how much income the borrower has when compared to recurring debt. This borrower ratio is a very powerful aspect of the overall creditworthiness of a consumer. The lender will weigh this percentage against other portions of a consumer’s credit health, and lean heavily on this factor when making a decision on creditworthiness. The way this percentage is calculated is by taking the total amount of recurring monthly debt, including housing and dividing that by the gross monthly income. 

The product will be a decimal expression and would then be multiplied by 100 to produce a percentage that is a ratio of debt-to-income. Usually, lenders like to see this percentage below 45% and around 28% for all recurring debt. The lower this percentage the better and if maintained at a low level for an extended period of time, years hopefully, than that application would receive a good rating, even if the credit score was on the low side. 

How to Secure Long Term Personal Loans 

The best way to secure long term personal loans is through a lender who offers those types of loans. Carrying multiple five-year loans, is not advisable, as the interest rate would be effectively higher than most longer-term loans. 

And over time the payments and interest would probably be close to double what would be paid out in a single loan over a longer-term. If all of the factors that would be considered for long term personal loans are bad, then here are a few ways to improve the odds overall. 

Credit Score Knowledge

Know what your credit score is for all three credit reporting agencies and your FICO composite score. These are the first factors all lenders look at when deciding on whether to risk lending to an applicant. Knowing how the score is compiled, how it is maintained and what it means to your creditworthiness is very important. 

Many people don’t realize that these scores are not written in stone and can be changed, sometimes as easily as paying down a credit card balance. These options are not hard to find, a search of the internet for ways to improve credit and credit scores will net a lot of helpful information. 

Credit Score Reality

People with credit scores above 720 will usually get approved for long term personal loans, with an interest rate of 11%, people with scores below 680 will pay a much higher rate, around 29%, and anyone below 550 will probably find themselves looking to build their credit score, and not carry a loan. Below 550 can find a home for a loan, with online lenders, but be careful of the payday lenders who offer quick cash for recent paystubs. 

The Quick Cash Trap

Many people who fall into the bad credit score, but hold a job category are offered payday loans, or the auto title loans, with fast approvals and automatic payments deducted directly from paychecks. That is garnishing the borrower’s income and they make sure they have the right to take as much or as little as they want. They are usually predatory lenders and should be avoided completely. 

The way they make money is to give low-value loans to low-income borrowers with APR’s of 350 percent or higher. The payments carry a fee above the interest rate fee, which is calculated daily and applied weekly, with increasing value, compounded at the end of each week. In the past, this was known as loan-sharking and has found a place in our society under the guise of guaranteed no credit check loans. The payments literally never come to an end. 

A Secured Loan Can Help

If your credit could be better and you have the opportunity long term personal loans can be had if there is sufficient collateral available. There are many items that can be placed for collateral, such as equity in a home, jewelry, fine items (artwork, unique china, etc.), vehicles, and even collectibles like baseball cards and musical instruments. 

The list is nearly endless and many times lenders will consider a combination of items or even a collection as security for long term personal loans. If there is a strong employment history along with a low DTI Ratio, usually the lender will approve the loan, even with a lower credit score. 

It is good to remember lenders want to approve loans, not just give to those who they like or feel deserve loans. The privileged few are now a thing of the past. All people should seek loans, whatever their circumstances while being realistic about their ability to carry long term personal loans. The lenders are there to lend money, not keep it for themselves. 

The best way to secure long term personal loans is to know what lenders look for and then make sure you, as the borrower, give it to them. Know your credit score, know your DTI Ratio, and don’t fall for the financial traps of payday loans, and doubling shorter-term loans. To start your personal loan journey, here are some of the lenders who offer long term loans can be found online: 

SoFi

A very popular online lender with relaxed requirements APR Range 6.20% – 15.24% (auto payments). The maximum loan term is 7 years.

Even Financial

This is a loan matching service who will find long term personal loan lenders with many options, including low interest. The maximum loan term is 7 years.

Marcus By Goldman Sachs 

Very low-interest rate loans, as low as 2.00% with traditional requirements, but a flexible view of those requirements. The maximum loan term is 7 years.

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