Long-term bank loans: Advantages and disadvantages
Long-term personal or business loans are typically bank loans that have a set maturity date of longer than three years, according to Entrepreneur.com.
Most long-term loans are set up for terms between three and 10 years and can run as long as 20 years or more. These loans require monthly, quarterly or annual payments with interest, and they have advantages and disadvantages that you should be aware of before taking responsibility for the debt.
Length of term
One advantage of long-term loans is the ability to negotiate the term itself.
A longer term typically means that instalments will be less, although it will take longer to pay off the debt. This advantage makes it possible to have instant access to funds for the desired purpose while being able to actually pay for it in predetermined smaller amounts over a period of time.
For businesses this can mean the ability to buy new equipment or complete remodelling or even start up a new business without having all the money up front. For personal loans it may fulfil an immediate need, when it would have otherwise been financially impossible.
Time to grow
Long-term loans have the advantage of allowing a business or person to grow financially as a result of the upfront investment. Assume a business is doing well but has hit the ceiling of growth because it would need to expand in order to become more profitable.
A long-term loan may allow for an immediate expansion without reducing needed operating capital and cause the profits to soar much higher. Without the long-term loan the upfront cost of the expansion may have been impossible or at least have been detrimental to the operation.
A long-term bank loan is well structured and has no surprises generally, according to DealFlow.org. The structure of the loan can be looked at throughout its duration so you know exactly how much money you'll need to pay each instalment before you have to come up with the money.
Long-term loans may seem like a way to save money in the beginning, but a closer look at the total payoff at the end of the term will likely reveal that you paid back considerably more money than you received initially. The bank has to make money from the transaction to remain profitable, and it gains profit from these loans.
Challenging to get approved
Long-term loans can be difficult to secure. For larger loans the bank will want to see complete financial records and will do a thorough financial analysis of your situation to determine whether you are a suitable risk for this kind of loan, according to Entrepreneur.com.
Limited financial options
The language contained within the loan contract itself may limit your financial options in some cases, according to Entrepreneur.com.
You may be unable to take on other financial obligations without violating the loan's conditions. This can even include giving yourself a higher salary if the loan is for a business that you own.
An example could be a long-term loan used for remodelling of a restaurant. Over the term of the loan the company needs to purchase new equipment such as a walk-in cooler, but the company cannot finance the purchase because the original loan prohibits the business taking on new debt. The owners may also be limited with their cash on hand because the loan could require the business to set aside a specific amount of profits for repayment of the loan.