It is rare for a consumer or business to have enough cash on hand to invest in large and expensive items such as a house or car and 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 a debtor must have a positive credit history, the ability to provide collateral, and capital.
Provided that those criteria are met, a long term loan can minimize the effect on operational cash flow, a debtor can borrow at a lower interest rate, a business can minimize investor interference, and it is also an effective way to build credit worthiness.
Long term loan advantages:
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 minimize time spent saving for investments and investors are able to realize potential earnings sooner to help offset the cost.
Lending institutions assume a high degree of risk on long terms loans, which usually requires the borrower to offer collateral. Often, the asset for which the funds are being borrowed can act as that collateral. If the borrower defaults on their payments, that asset can then be seized, or repossessed, by the lender. 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 borrower being evicted and ownership of the house transferring to the lender.
Generally, long term loans have a very structured payment process that has been designed to meet the payment capability of the borrower, notwithstanding unforeseen events. Therefore, making regular payments on a long term loan will allow an individual or a business to build their credit worthiness.
