Features of long term loans

long_term

If you are a business entity, you have access to either long term or short term loan. However, we both know that short term loans are not viable in a business setting especially if you are considering buying stock, machinery or even buying a business car. In most instances, businesses prefer to go for long term loans as opposed to short term debts. We are going to take a look at some of the characteristics or features of long term loans or long term debt. What is it about long term loans that you need to know about? What are some of its features?

Collateral

A long term loan cannot be advanced to a business in the absence of collateral. A business would need to pledge an asset of sorts to act as security. Conversely, if a business is seeking for a long term loan to buy a piece of land, then the lender would always use the land to be bought as security. The same applies for a mortgage on a business building or a loan on business machinery. Should the business be unable to reimburse the loan advanced to them, the lender can always sell the collateral to recoup money they had advanced to the business entity.

Term of the loan

Generally, unlike short term loans, long term loans last for a period of anywhere between one year to a maximum of 30 years. The term of the loan is determined by the value of the respective asset or item that a business is seeking financing for. For instance, it would be crazy for a car loan to attract a 20 year financing especially considering that a car is a depreciating asset and its value would have diminished considerably in 20 years. Conversely, a land loan would attract a 20 year financing or repayment period because of the fact that land is an appreciating asset and hence its value is bound to increase over the years.

Interest rate

As compared to short term loans, long terms generally attract a low interest rate and the rate ordinarily don’t fluctuate over the term of the loan and if they do fluctuate, it is never for a higher interest than what was set at the time of applying for the loan. The reason for the relatively low interest rates is because of the security of the asset pledged. Another interesting or good thing about the long term loan is the fact that a person pays considerably less interest as the principal amount reduces over a period of time.

Risk

A business seeking for long term debt shouldn’t take it as given that they would be approved for a long term loan. Generally, lenders are wary of businesses embroiled in a lot long term debt. Lenders generally extend long term loans to businesses or companies with a low debt to equity ratio. As such, if a business has a high debt to equity ratio, then they might find themselves in a quandary in so far as advancement of long term debt is concerned.

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