Long-term loans can help applicants with bad credit get their heads above water. On the other hand, they could cause them to drown in additional interest charges.
Long-term unsecured personal loans do not require collateral. This means that you could lower monthly payments without the risk of losing your home, car, or other treasured valuable.
Long-term installment loans do require the applicant to pledge collateral. This means your approval odds are better, and you could qualify for lower interest rates.
Understand the pros and cons of both contract types before taking the plunge and completing an online application. The process is not always quick and easy.
Unsecured Long-Term Personal Loans Online
An unsecured long-term personal loan for bad credit applicants is not always an easy process. There are no guarantees of approval, or that you will improve your financial standing. Make certain that you understand the advantages and disadvantages before you apply.
Request a personal loan online – once you determine that this step is the right to take. You could consolidate debts into a single low monthly payment without putting an asset at risk of repossession. However, you could incur far more interest charges over time.
Long-Term Loan Advantages
First, consider the advantages of long-term unsecured personal loans for bad credit applicants – if approved. A quick look at definitions brings the pros to the surface.
Long-term loans have low monthly payments. You settle the obligation over an extended period – usually at least one year or more. The lengthier the term is, the lower the monthly payment will be. This makes it easier for the applicant to meet debt-to-income underwriting criteria and increases the odds of approval.
Unsecured personal loans do not require collateral. You do not have to pledge a house, car, or boat. The online lender relies on a promise (or signature) to repay the obligation on time. In the event of default, the company cannot repossess your house, car, or boat without first filing a suit in court.
Long-Term Loan Disadvantages
Second, examine the disadvantages of long-term unsecured personal loans for bad credit applicants. It is very difficult to garner an approval. If you do, expect to owe significant interest while holding onto the lender’s money.
Low Approval Rates
High-risk borrowers rarely qualify for unsecured long-term personal loans.
Without collateral to repossess in the event of default, the lender faces greater losses. Filing lawsuits to garnish wages or place a lien on personal property is expensive – assuming the applicant has any assets worth chasing after.
Extending the repayment period increases uncertainty. The further out a time horizon is, the greater the level of uncertainty there will be. The more time that you inject into the equation the greater the odds will be that an applicant will deal with unemployment, health issues, surprise expenses, or disability. Any of these common mishaps could lead to default.
First-time borrowers also face a similar approval rate dilemma with long-term loans.
Higher Interest Charges
Long-term unsecured personal loans come with higher interest rates and greater cumulative interest charges. This statement is true because the rates reflect the higher risk of default, and the interest has more time to accumulate.
Unsecured personal loans charge higher interest rates to offset the greater risk of this account type. Online lenders charge interest to offset the time value of money and the projected default rate. Borrowers with poor credit credentials have the highest default rates.
- Unsecured contracts have higher default rates because the borrower does not risk losing his or her collateral.
- Extended repayment period contracts have higher default rates. This is because more bad things (like unemployment) can happen over an extended period.
Unsecured personal loans with long-term payments accumulate more interest over an extended period. The interest has more time to grow. This is quite easy to explain through a simple chart. Notice how the total interest charges on a $5,000 original principal amount with a 15% annual percentage rate (APR) grows as you extend the repayment period.
Long-Term Installment Loans Online
A long-term installment loan for bad credit applicants is sometimes an easier process. Installment contracts require collateral. The applicant pledges the equity in his or her house, car, or boat. This protects the lender in the event of default. This makes installment contracts less risky for banks to approve.
Request a personal installment loan online. Depending on your qualifications, the finance company could offer lower interest rates or payday cash advance as a default.
Lower Interest Rates
Long-term installment loans offer bad credit applicants lower interest rates than their unsecured cousins (the personal variety described above). Lenders can offer lower interest rates because they face better default risks and lose less money when borrowers do default.
- Borrowers are more likely to stay current if they risk losing a valuable asset.
- Banks can recoup most of their losses by seizing and selling the pledged asset.
In the event the borrower defaults, the lender can repossess the asset without first filing a lawsuit. The contract signed at application gives them this right. Before completing an application, be aware that you could lose a valuable asset if you default.
- New car
- Vehicle title
- Life insurance policy
By definition, long-term installment loans are not payday loans. With a payday cash advance, you must remit the entire balance in accordance with your employer’s payroll cycle. This is normally weekly or bi-weekly – sometimes monthly.
Payday loans do not have a repayment period lasting one year or more. You can roll them over as many times as you like, and take a year or more to settle in full. However, the rollover fees add up very quickly. They are a debt trap best avoided. They charge a steep price to borrow money without a credit check.
Online lenders rarely approve bad credit applicants for long-term installment loans. Many applicants simply do not have a valuable asset to pledge as collateral. The companies often default to offering a payday cash advance to give the prospect an option.
Steer clear if this happens to you – unless it is a real emergency – and you can reimburse the payday company in full right away.