Long term loans

What are long-term loans?

A long-term loan is a type of loan, the repayment tenure of which is more than 3 years. The maximum tenure for repayment of any loan is 30 years. Therefore, we can say that loans which have a repayment tenure between 3 years to 30 years are the long-term loans. Loans such as a Home loan, car loan etc are the long-term loans.

The reason behind the long repayment tenure is the huge quantum of loan. To make it affordable for a retail customer, it becomes necessary to spread the repayment in a longer period of time. It is the main reason behind people getting confident enough to avail loans of a huge amount. Since it involves a huge amount, there is always a risk of default for a lender. Therefore, prepayment option is always open for the customers. Whenever a person can, he/she can clear off his/her debt before the completion of the repayment tenure.

Features of long-term loan

Following are the details about the important features of long-term loans,

  • Secured loan- The majority of long-term loans are secured ones. In a home loan, the house property for which the loan is taken stays mortgaged with the bank until the borrower clears his/her due. The same is with the car loan. However, there is one exception which is the personal loan. The personal loan is an unsecured loan which is given for both long and short durations.
  • The low rate of interest- The rate of interest in such types of loan is generally low as in most categories there is a back support of the collateral.
  • Long repayment tenure- The main reason why they are the long-term loans is that the option of the longer repayment tenures.
  • Huge amount- The amount granted as the loan in long-term loans are mostly huge and that is why they have long durations for repayment.
  • Multiple repayment modes- There is no obligation that one has to take one repayment mode. Rather they can choose from post-dated cheques, Electronic Clearance Services, and auto-debit facility.

Types of long-term loan

  1. Home loan- The most common type of long-term loan is a home loan. It allows a repayment tenure which can be as long as 30 years. In a home loan, the financial institutions often finance more than 80% of the property value, which comes out as a huge value. To simplify the EMIs so that at least the basic needs of the customers are not hampered, the repayment is stretched for a long period of time. Due to this feature only, owning a house is no more a dream. It has become a reality for many.
  2. Personal loan- To meet your personal needs you often have sufficient money from your income. But what happens when the requirement is much more than your income or savings. For example, when there are wedding expenses, medical emergencies, house or office repair, buy any machinery for the business. For such situations, a personal loan is the best solution. It is a collateral-free loan and therefore helps many in meeting the unforeseen expenses that come all of a sudden. A personal loan can be both short and long-term loan. The personal loan for the duration of more than 3 years is a long-term personal loan.
  3. Car loan- A car loan has a repayment tenure from 3 to 5 years. Since it is more than 3 years, it also comes under a long-term loan. In car loan as well, the financing institution lends a maximum portion of the car value. Hence, the amount is huge and the repayment tenure has to be stretched to make the loan affordable for the majority of the people.
  4. Education loan- The loan which a student takes to support his or her higher education is an education loan. The repayment tenure of varies from institution-to-lender and also from case-to-case. But it surely exceeds 3 years and therefore it is a long-term loan. In such type of loan, the parents become the guarantor for the student and the student has to pay back the loan as soon as he/she gets an employment. Therefore, the repayment tenure has to be long enough to make it affordable for the borrower.
  5. Mortgage loan- Also known by the name of loan against property (LAP), this type of loan is a long-term loan. The amount is usually huge as it is given on the basis of the value of the property which is put as security. That is why the repayment tenure is long in order to make it easy for the borrower to repay.
  6. Loan to MSME sector- The loans given for the business purpose to the Micro Small and Medium enterprise groups is also a long-term loan because the minimum tenure on such type of loans is 3 years.

Eligibility for long-term loans

  • Income of the applicant- The applicant must be capable enough to clear off his or her debt in the long run. And for that, he/she must have a steady source of income. For income also there are certain conditions such as,
    • The income must be equal to or more than the minimum requirement criteria of the bank/NBFC.
    • The salaried applicant must receive his or her salary on a fixed date.
    • Applicant must earn more than his/her basic requirement.
  • Age- The minimum required age is 21 years and the maximum is 60 years. However, some lending institutions allow the minimum age of 18 years and some allow the maximum age of 65 years.
  • CIBIL score- The credit score of the applicant plays a major role in decision making for the banks.
  • Guarantor- Long-term loans often require a guarantor. Owing to the long repayment duration, there is a huge risk of the borrower becoming incapable to repay the loan. The reason being the death of the applicant, the applicant becoming physically challenged, the applicant losing his/her job, the applicant facing loss in business and many such other reasons. Therefore, it becomes utterly necessary to add a guarantor in the loan.

Documentations required for long-term loan

Employed Self-employed
Application form Duly signed application form along with 2 passport-size colored photographs. Duly signed application form along with 2 passport-size colored photographs.
Photo ID and age proof PAN card, Adhaar card, Driving license PAN card, Adhaar card, Driving license
Income proof Last 3 months’ salary slip, Form 16 or Income tax return Last 3 years income tax return with the computation of income.
Income track record Last 6 months’ bank statement Last 6 months’ bank statement

Reasons that lead to long-term loan rejection

  1. Existing loan- When the applicant has already existing liability chances are there that his or her loan might get rejected. However, it is not always the case. If the applicant has enough income that he/she can borrow more money, then there is nothing to worry about. On the contrary, if the existing loan of an applicant is taking a major chunk out of his or her income in the form of EMI, then the loan application will be definitely rejected.
  2. Poor CIBIL- Even if one has no existing loans, but if there was a loan in the past in which there were late payments or the worst case there is a default, then it may prove fatal. Things such as default, late payment of EMI and cheque bounces can lead to poor credit score. The bank and the NBFCs never grant a loan to an individual who has a bad track record in loan repayments.
  3. Wrong data- The data provided in the KYC document of the applicant is proved to be wrong then the loan rejection will definitely happen. Things like when the applicant has moved to some other place but the documents are still showing the old address of the applicant, then it looks like the applicant is trying to deceive the lending institution.
  4. Data discrepancies- Every bank and non-banking financial institution will ask for more than one document as the applicant’s KYC. If there is any sort of mismatch in the data mentioned in two or more documents then the lender will find it doubtful. Mainly the data such as the date-of-birth, full name and address must duly match in all the documents.
  5. Income steadiness- The unsteady income often discourages the financial institutions to grant a loan to the applicant of such profile. The following are the factors that lead to income unsteadiness,
    1. When there is no one fixed date of receiving a salary every month.
    2. Frequent deductions from the salary due to leave.
    3. When the major part of the income is incentive based.
    4. For self-employed, if there are significant fluctuations, especially downfall,  in the annual income.

Tips to avoid long-term loan rejection

1. Clear off the debts- If you are already having an existing loan which taking a huge portion of your income then avoid taking any further loan. Repay the loan before taking any other loan. Even it is in the best favor of the individual also to take only that much loan what his or her income allows.

2. Maintain good track record- Always make sure that you repay your loan by the timely payment of the EMI. The late payments hampers your CIBIL score and can lead to loan rejections. Similarly, also ensure that the person for whom you are serving as a guarantor is also making duly payments of his or her EMI. It ihas to be done because that person’s poor performance can affect your financial history as well. When unsure, entirely avoid being guarantor for someone.

3. Update KYC- Kepp your KYC document always up-to-date. If there is any changes in your name or the address, do the respective changes in your KYC as soon as possible. Even if there are any sort of errors in the same, get it corrected before submitting it along with your loan application.

4. Steady income- Mostly you cannot do anything about it because it depends on company norms. But you can do tal with the authorities to help you regularize your income.