Introduction to long-term loans
It is rare for a consumer or business to have enough cash to invest in large and expensive items, such as a house or car, and long-term loans provide the necessary financing for this type of purchase. Long-term loans can last from three to twenty-five years, and to qualify, the debtor must have a positive credit history, the ability to provide collateral and capital. Provided that these criteria are met, a long-term loan can minimize the impact on operating cash flows, the debtor can take out a loan at a lower interest rate, the company can minimize investor interference, and is an effective way to build creditworthiness.
Advantages of a long-term loan
Capital is a limited resource and investing large amounts in any assets or projects limits the availability of capital for other investments. Long-term loans minimize saving time for investments, and investors are able to realize potential profits faster to offset costs. Although maintaining some cash is important to alleviate unexpected expenses, saving large lump sums is inefficient. Long-term loans increase the flexibility of the investor’s limited capital, enabling its distribution in many investments and minimizing the immediate impact on operational cash flows.
Lower interest rates
Credit institutions accept a high level of risk on long-term loans, which usually requires the borrower to offer collateral. Often, assets for which funds are borrowed can provide security. If the borrower defaults, the asset can be seized or taken over by the lender. The simplest example is a mortgage – the debtor borrows money to buy a house, and also uses the house as collateral. Until the maturity date of this loan – when the debtor becomes the sole owner of the asset – the outstanding payments will evict the borrower and transfer the ownership of the house to the lender.
Minimizes interference with the investor
Searching for private investors and issuing shares are common ways to raise money for potential investments. However, they are also ways to divide the ownership of an enterprise, and thus to redistribute control. Long-term loans are an opportunity to finance potential investments while maintaining control over the company.
In general, long-term loans have a very structured payment process that was designed to meet the borrower’s ability to pay, regardless of unforeseen events. Therefore, making regular payments for a long-term loan will allow an individual or company to build creditworthiness.