Introduction of Long-Term Loans
A long-term loan is a type of credit paid over a considerable period, usually more than 3 years. This loan tenure can be somewhere between 3-30 years. Home loans, car loans, and personal loans are the perfect examples of long-term loans.
In addition, long-term loans are also availed from financial institutions to meet crucial business requirements or personal needs. Such requirements include the purchase of machinery or property.
At present, long-term loans are prevalent in the financial industry. With the surge in technology and proficient banking solutions, auto and home loans have become the most common type of credit. Since such loans propose a substantial credit amount, the loan repayment tenure is spread over an extensive period.
Here are some prime aspects of such loans:
- The structure of such a loan can differ significantly based on the cause for which the loan is being acquired.
- Such loans provide the option of prepayment to the customers. It helps loan borrowers pay off the loan faster than the specified timeline. As a result, such borrowers do not have to pay for long tenures incessantly.
- Long-term loans are authorised depending on the daily income of an applicant. Such loans need a consistent income source and some collateral that must be submitted to the loaning bank.
Examples of Long-Term Loans
Long-term loans are a type of credit that spreads the repayment over a considerable period. This description applies to different categories of loans. A long-term loan is an extensive classification of loans. It has multiple sub-categories of loans under it.
Here is a brief overview of some of the most prominent instances of long-term loans:
1. Home Loans
Home Loans are considered one of the best instances of long-term loans. Usually, a home loan repayment tenure is around 3 years, and the loan amount is substantial. It is mandatory to submit collaterals to the lending bank. Not to mention, a guarantor is also needed to sign the loan request.
A home loan offers the option of pre-closure to its customers. Pre-closure charges are applied or skipped based on the bank offering home loans. Furthermore, home loans also allow buyers to select between a floating rate of interest and a fixed rate of interest.
2. Education Loans
Education loans are also called student loans. Such loans are usually sanctioned for an extensive period for courses like medical and engineering. The repayment tenure of such loans is usually longer. Such loans are taken for 3 years and can extend up to 30 years.
Education loans are normally applied by students who wish to pursue higher studies in India or abroad. The rate of interest and loan amount limit may vary based on two factors. The two factors are:
- The course for which the loan is being applied.
- The lending bank or financial institution
Note: According to RBI, the lowest lending rate of banks in Aug 2022 was 8.53% for private banks and 7.65% for public sector banks. It has scaled up by 10bps compared to July 2022.
3. Personal Loans
Personal loans that include a repayment tenure of more than 3 years fall in the category of long-term loans. However, the interest rate is high even when such a form of credit is not in tenure.
This is because personal loans are unsecured long-term loans; hence the borrower is not required to provide any collateral as a guarantee. Banks fall short of any collateral if a borrower cannot pay the personal loan.
4. Car Loans
Car loans are now considered one of the most crucial loan instruments. With banks easing the process of acquiring credit to purchase automobiles, the demand for car or auto loans has scaled up.
Since cars fall in the category of luxurious items, the rates on such loans are more than home loans. A typical car loan usually has a long-term loan repayment tenure of around 7 years. Car loans have the option of prepayment of the loan, and certain banks request the pre-closure fee. However, some banks do not ask for a pre-closure fee from the customers.
5. Small Business Loans
Around 82% of small businesses have shut down due to insufficient cash flow management. Around 29% just depleted their cash reserve.
Businesses often require credit to buy the latest machinery and fuel their expansion. Such credit is in the form of loans, also called as small business loans. Companies and single customers can avail of a long-term loan.
All private and government banks include small business loans in their loan portfolio. Such loans have a repayment tenure of more than 3 years. Not to mention, small business loans can leverage the facility of loan repayment instalments for a considerable number of years.
6. Long-term Payday Loans
Small loans obtainable for an extensive repayment tenure are called long-term payday loans. Such loans require the same eligibility criteria and document requirements as other long-term loans.
Such a type of credit is best suited for customers with urgent financial requirements but can only pay in small instalments. The repayment tenure of such loans is substantial.
Features of Long-Term Loans
Long-term loans are premeditated. The loan repayment tenure of these planned borrowings is programmed over an extensive period.
Here is an overview of the main features of a long-term:
Appealing interest rates
Due to the quantity of the loan and the considerable tenure involved, the interest rate is usually low compared to other categories of loans. Huge competition in the industry also ensures that banks offer a significantly low interest rate.
Repayment in Instalments
The reimbursement of long-term loans usually happens in parallel instalments, expanded over a considerable period. Such monthly instalments comprise two elements, principal and interest.
Higher Loan Amounts
Long-term loans guarantee higher principal amounts than short-term or quick loans. Based on individual financial competency, banks offer higher loan amounts to borrowers.
Long-term loans are provided only when collateral is guaranteed. If the borrower fails to repay the loan amount, the bank can take possession of the asset used as collateral to compensate. It makes the loan secure and reduces the risk of an applicant’s default.
Tax Benefits on Long-Term Loans
One of the primary advantages of availing of long-term loans is tax exemption. For instance, a home loan that offers tax benefits to all borrowers. It is a given fact that under section 24 of the Income Tax act, a borrower may claim a tax deduction of Rs. 2 Lakhs per annum on the interest given on the housing loan.
Benefits of Long-Term Loans
When a business has a calculated financial requirement, availing of a long-term loan is the best move. Here is a list of the benefits of availing long-term loans:
Lower Interest Rate
Because of the long loan tenure and a huge principal amount that is borrowed, long-term loans offer a lower and more competitive interest rate. Attaching collateral to such a loan is imperative, making it a low-risk transaction for any bank.
Since a long-term loan meets the bigger need, the surplus finances can be used to meet other business obligations. Hence, it simplifies any financial problem that could have existed.
A majority of the long-term loan can be utilised for tax exemption. It helps to save capital from being used somewhere else.
Long-term loans are usually customised as per the requirement of an applicant. If the credit history and documents are proper, the interest rate and the loan repayment tenure can be negotiated with the bank.
An existing bank customer can submit the required documents and apply for long-term loans online. It makes the loan sanctioning process quicker and reduces tedious paperwork.
Eligibility Criteria for Long-Term Loans
Long-term loans include massive loan amounts and credits. Hence, they have strict eligibility rules. However, such criteria do not match with other lending banks.
Here is the list of some of the most common criteria that apply to long-term loans:
- Applicant must have a regular source of income
- Applicant must be a resident of India
- Applicants must be between 18-35 years of age
- Applicants can be self-employed or salaried
- Applicants must have a guarantor to sign the particular loan application.
- Applicant must have a minimum income of Rs. 15000 per month or more.
Documents Required for Long-Term Loan
There are certain documents required to be submitted to the particular lending bank. Such documents need to be approved to sanction a long-term loan. The document list varies depending on the lending bank.
Usually, banks need a copy of the following list of documents:
- Identity proof, Voter ID, Passport, Driving License, etc.
- Optional guarantor form, completely filled
- Applicant’s salary slips
- Permanent address proof
- Income statement proof of the guarantor or co-applicant
- Bank statements, if needed
Interest Rates and Other Charges
Long-term loans provide lower interest rates because of the amounts included and the extended repayment tenure. The interest rate is generally influenced by the loan amount, income source, tenure, and credit history of the individual. When the loan amount increases, the rate of interest can be reduced significantly.
The credit ranking of an individual influence the interest rate. If an individual has a poor credit score, banks will levy higher interest rates since the individual has poor credibility.
For long-term loans, the interest rate is either floating or fixed type. Usually, the interest rates range from 8-12%, based on the type of loan. It is highly recommended to check the interest rate with other banks, prior to applying to a specific lender.
Here is an overview of some of the notable charges levied by banks during processing a long-term loan:
|Processing charge||Depends between Rs. 700 to Rs. 2500|
|Cheque swapping||Rs. 100 for examples|
|Repayment schedule edit||Rs. 200|
|Prepayment charge||Depends on 2-6% of the remaining principal|
|Overdue EMI interest||Nearly 2% per month|
How to Apply for a Long-Term Loan
Long-term loans are acquired from different financial institutions and banks. As a result, loan processing time gets reduced along with the paperwork. Most banks today provide an online option to avail of such loans.
Another way to apply for a loan is by visiting the bank directly. By consulting with the bank’s representative for credit and submitting the needed documents, it is possible to apply for a long-term loan.
Sometimes, banks provide the “Call Back” option. In this option, one can dial the provided number, and the concerned representative will get back with a call. Once the discussion for long-term loans is over, the bank sends the representative to the borrower’s address to collect the documents for further processing.
To process a long-term loan, maintaining a healthy credit score is imperative. Presently, banks evaluate a loan application depending on the credit score.
If an applicant’s credit score is low, it is always recommended to fix it. The applicant must clear the present dues and boost the credit score to an acceptable level. It will increase the chances of getting the loan application approved.
Top Banks Offering Long-Term loans
|Banks||Rate of Interest|
|ICICI Bank||10.75% onwards|
|Kotak Mahindra Bank||10.99% onwards|
|IDFC First Bank||10.49%- 25%|
|State Bank of India||10.30% - 15%|
|Axis Bank||10.25% onwards|
|Bajaj Finserv||13% onwards|
A steep fall in private and public investments for primary growth sectors has created huge gaps in the road to development. It is imperative to rope in private sector investment and finance to meet the evolving global development objectives.
Long-term loans are the perfect examples of such investments and finance. Such loans help businesses to meet their urgent requirements or fund expansion schemes. Long-term loans not only promise stability plus working capital to businesses but also fuels expansion.
A long-term loan is paid off for a considerable period. The period usually ranges from 3-30 years.
The bank decides the loan amount that is provided to the borrowers. Such a decision of a ban depends on the details offered by a borrower. Primarily, the loan amount is influenced by the regular income of the borrower, repayment capacity, and credit score.
No. Only businesses can apply for long-term loans on the Yubi Platform.