Comparing long-term loans: a simple guide

Thinking of taking out a long-term loan?

Long-term loans work differently to short-term loans and may not be suitable for every borrower, especially if you have a bad credit history.

Find out what you need to know about this type of borrowing in our guide.

Thinking of taking out a long-term loan?

Long-term loans work differently to short-term loans and may not be suitable for every borrower, especially if you have a bad credit history.

Find out what you need to know about this type of borrowing in our guide.

Rob Silvey
Finances expert
minute read
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Posted 21 NOVEMBER 2019 Last Updated 30 NOVEMBER 2020

What is a long-term loan?

A long-term loan is usually taken to mean a debt that’s paid off over a period of more than one year. Long-term loans involve borrowing money over a specified period with a pre-planned payment schedule.

Loans for higher amounts, paid back over a longer period (usually 15 years or more), will normally be secured against an asset, like your home. If you fail to meet the monthly repayments, your home or any other asset you used as security, could be repossessed.

Are long-term loans cheaper than short-term loans?

Not necessarily. Monthly repayments can be more manageable than short-term alternatives, but because you’re repaying the loan over a longer period you may end up paying more interest overall.

Why it’s important to consider how much money you need

Knowing how much you need to borrow will help you decide where best to find that extra cash injection.

  • If you only need to borrow a small amount of money for a very short time, consider using your interest-free overdraft, if you have one. If not, it could be worth looking at different current accounts that offer this facility.
  • Credit cards with 0% interest on purchases could be worth a look, particularly if you need to buy something specific. As long as you pay back what you owe within the interest-free period (and make at least the minimum monthly payments on time), you can be smug in the knowledge that the credit hasn’t cost you a single penny extra.

If you need a larger sum of money, a personal loan could be the best answer. You can usually opt to borrow a minimum of £1,000, with upper limits depending on the lender. Most will lend you up to £25,000, although some may go as high as £50,000.

The best APRs (annual percentage rate – this is the amount of interest, plus any fees, you pay on top of your loan) are reserved for customers with the best credit ratings. That’s why when you apply for a loan, you need to know that the APR you see might not be the one you get, unless it’s labelled as a guaranteed APR.

What are the benefits of long-term loans?

Some advantages include:

  • Flexibility. You can find a long-term loan ranging between £1,000 to £100,000. You’ll have anything between 1+ years and 25 years to pay it back, depending on the amount borrowed and the time period that suits you.
  • The possibility of lower interest rates than short-term loans. Check the representative APR to compare rates from different providers. But remember, the rate shown isn’t necessarily the one you’ll get, as that will depend on your credit history and personal circumstances.
  • Paying back over a longer period can mean lower monthly payments, which are more affordable if you’re on a budget, although you may pay back more overall.

See the impact of paying back over a longer period in this example:

Loan Loan period APR Monthly payment Total payment Cost of loan
£5,000 3 years 8.6% £157.33 £5,663.70 £663.70
£5,000 7 years 8.6% £78.63 £6,604.65 £1,604.65

Although the monthly payments are more affordable, the overall cost of the loan increases when it’s paid back over a longer time.

You might opt for a long-term loan because you can’t afford to pay the money back over a shorter period of time. Nevertheless, make sure you fully understand the terms and can afford the repayments.

What is APR?

APR, or annual percentage rate, shows the total cost of borrowing over the course of a year, including the interest rate plus any fees automatically added to the loan. ‘Representative’ APR, which is what you’ll see advertised, is the rate that must be offered to at least 51% of successful applicants, but it isn’t necessarily the one you’ll get. That’s called the ‘real’ APR and will depend on several things, including how much you want to borrow and your credit score.

Find out more about APR.

What are the disadvantages of long-term loans?

Some disadvantages may include:

  • Early repayment charges. Long-term lenders may charge you for making early repayments. This isn’t always the case, but it makes sense to check before you take out a loan.
  • Interest charges. You may pay more, overall, than you would for borrowing the same amount of money as a short-term personal loan.
  • Other fees and changes. Be aware of these, including fees for missing payments.

Is it possible to get a long-term loan with bad credit?

Although it’s not impossible to get a long-term loan with bad credit, your choices may be limited. It’s highly unlikely that a lender will approve you for a long-term loan without a credit check. Also, be aware that interest rates for bad credit loans are usually higher.

If you have lots of debts with different lenders, then a long-term debt consolidation loan could be an option. Rather than repaying numerous debtors varying amounts, this could let you consolidate these payments into one, hopefully lower, monthly amount.

However, there are some downsides you’ll need to consider:

  • Some providers will only offer long-term debt consolidation under secured arrangements, which involve using your home as collateral. This means you could lose your home if you fail to make your repayments.
  • Taking out a long-term loan could extend the term of your original loan. In this case, you could pay more interest.

If you have a bad credit rating or no credit history at all, you might also need to provide a guarantor to get approval for a long-term loan.

If you’re struggling with debt, talk to your lender about what options are available to you. You can also get free expert debt advice. See where to get free debt advice on the Money Advice Service website.

Do I need a guarantor for a long-term loan?

If you have a good credit history, you won’t necessarily need a guarantor to get a long-term loan. However, if you have a poor credit rating or no credit history at all, having a guarantor with a good credit history could improve your chances of getting a long-term loan.

A guarantor is someone – usually a family member or close family friend – who will guarantee to take over the loan repayments if you’re unable to. It gives lenders an added assurance that the loan can be paid back.

Can I pay back a long term loan early?

Yes, your lender may allow you to overpay by a set level every year, but you might have to pay early repayment charges. Check the terms of your loan to see what, if anything, you can pay in addition to your monthly payment to shorten the length of your loan. Before you take out a loan you should fully understand what your early repayment options are.

What is an instalment loan?

An instalment loan is just another name for a personal loan where payments are spread evenly over the length of the loan. This is different to a credit card, where what you pay can vary month to month, based on what you spend and if you pay more than the minimum.

If you get a loan, your lender will expect you to set up a Direct Debit to pay the loan back on a regular schedule.

How can I find a long-term loan?

You can compare long-term loans online with our comparison service. With just a few clicks, you can see what options are available for the size of loan you want. Compare now and get the right deal for you.

Compare the Market Limited acts as a credit broker, not a lender. To apply you must be a UK resident and aged 18 or over. Credit is subject to status and eligibility.

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