Long term loans can be a positive exercise for the consumer and a business. The loan increases the flexibility of an investor’s limited capital. Also, the positive credit that they develop makes it easier and potentially cheaper to borrow in the future. We took a look at the advantages of long term loans.
An Introduction to Long Term Loans
It is rare for a consumer or business to have enough cash on hand to invest in large and expensive items. Items you desire such as a house or car. Long term loans provide the necessary debt financing for these purchases. Long term loans can be from three to twenty five years in duration and in order to qualify for one a debtor must have a positive credit history. Additionally they must possess the ability to provide collateral and capital. Provided that potential borrowers meet such criteria, a long term loan can minimise the effect on operational cash flow. Additionally, a debtor can borrow at a lower interest rate. A business can minimise investor interference, and it is also an effective way to build credit worthiness.
Advantages of Long Term Loans
Cash Flow
Capital is a limited resource and investing large amounts into any asset or project limits the availability of capital for other investments. Long term loans minimise time spent saving for investments. Investors can to realise potential earnings sooner to help offset the cost. Although keeping some cash on hand is important to mitigate unexpected expenses, saving large lump sums is inefficient. Long term loans increase the flexibility of an investor’s limited capital. They allow for its distribution over multiple investments. Loans also minimise the immediate impact on operational cash flow.
Advantages of Long Term Loans – Lower Interest Rates
Lending institutions assume a high degree of risk on long term loans, which usually requires the borrower to offer collateral. Often, the asset borrowers utilise to acquire a loan is good collateral. If the borrower defaults on their payments, lenders can repossess or seize the asset in question. The simplest example is a mortgage – a debtor borrows money to purchase a house and also uses that house as collateral. Until the date of maturity of that loan – where the debtor becomes the sole owner of that asset – defaulted payments will result in the lender evicting the borrower and ownership of the house transferring to the lender.
Build Credit
Generally, long term loans have a very structured payment process that creditors design specifically to meet the payment capability of the borrower, notwithstanding unforeseen circumstances. Therefore, making regular payments on a long term loan will allow the borrower to build their credit worthiness. For a business owner, building a business’ credit is important to rely less on personal credit for future debt financing.
Uses for Long Term Loans
It can be very advantageous to take out a long term loan for both a consumer and for a business. After the maturity date and when full ownership is assumed, the former debtor can use the asset and the positive credit they have developed paying for it for future borrowing. Thus, reliable debtors experience a compounding effect of the advantages of a long term loan.
