Long-term debt: what’s good and what’s not
Long-term loans feature in situations wherein you do not have cash in hand to invest or purchase something of a high ticket value. There are different kinds of long-term loans that provide the funds you need to purchase a house or a car, or to start a company of your own.
The tenure to pay off a loan can last for three to twenty five years for a long-term debt. In order to get a long term loan from financial institutions successfully, you should have good credit history, capital, and the ability to provide a collateral. If you fulfil these criterias, then you can take a loan on lower interest rates, lower investor interference (if you’ve taken a business loan), and increase your creditworthiness.
The Bright Side of Long-Term Debts
Here we shall take a look at the advantages of long-term loans and analyse their worth.
When your capital is limited, using the whole of it to fund a project or a purchase takes away the money that you could spend for other investments. A long-term loan minimises the need and time to save for large investments and that gives you the chance to utilise your earnings for other high-priority requirements. It also provides the funds necessary for multiple investments, making your capital flexible. These days you could opt for any kind of long-term loan, like business loan or home loan, which can be availed from providers like Bajaj Finserv who offer funds of up to 30 lakhs for different needs.
Lower Interest Rates
Probably one of the greatest benefits of long term debts is having a lower interest rate compared to short-term loans like personal loan or credit card payments. The interest rates for credit cards can easily create expensive payments. However, you could easily get a loan from financial service providers like Bajaj Finserv that offer home loans at interest rates as low as 9.85%.
Once you have a long-term loan you can be assured of a steady form of financing. You wouldn’t have to look for finance each month, like you do with short-term loans. Since most long-term loans have fixed interest rates and fixed payments each month, you could easily budget your monthly spending. This might prove to be very difficult to do with the terms of short-term loans.
The Disadvantages of Long-Term Debts
A long-term debt has plenty of goods to offer, but no matter what one says, it is still a liability. Here are the disadvantages of long-term debt.
Higher Interest Cost
The longer you extend your tenure for a long-term loan, the higher the cost of interest goes. When you have a short-term loan, there is not enough time for the interest rates to increase. However, that is not the case with long-term loans. The level of interest can be so high that you could end up paying more money on interest than the product itself. The interest rate is normally calculated depending on the risk involved while lending money. Calculate the cost of interest on a home loan using this calculator.
Slower Equity Growth
When you are paying off long-term bank loans such as a home loan or business loan, the lenders accrue you equity. Equity lets you differentiate between the money you have and the money you owe. Long-term loans generally have smaller interest rates and instalment payments. This increases your equity at a much slower rate than short term loans. The faster you pay off your loan, the more your equity you get for your home or business. This also brings up your net worth, which is your total assets minus your debts. Equity is valuable and can be used as collateral when taking a loan.
If handled wisely, long-term loans can be far more advantageous and overshadow their cons. Bajaj Finserv offer a wide range of loans for your long term needs with benefits like nil foreclosure charges and part prepayment facility.