- The lending industry currently recognizes three common reasons for a consumer to apply for a long-term personal loan: to make a major purchase or investment, to make some home improvements or needed repairs, or to consolidate debts. Prospective borrowers who do not own real estate have found that this is a loan product that works for them, since it does not require a major asset to secure it.
- Whereas a home equity loan is secured by a major asset---the home---a long term personal loan is an unsecured debt, and the lender has to rely on the borrower's assertion that he intends to repay the loan as it is written. Lenders protect themselves from assuming too high a credit risk by charging interest rates that are higher than home equity loans, lines of credit, or an entire mortgage refinance.
- Depending on a borrower's creditworthiness and the bank's lending products, some lenders offer personal loans that mimic a line of credit. Much like a home equity line of credit, the borrower may use as much or as little of the extended credit as he likes, and when he pays down the balance he may use more of it. Other personal loans simply give the borrower the money, and then the borrower needs to repay the loan as agreed. He does not get to ask for more credit based on the amount he already paid off.
- Unlike a home equity loan, a personal loan's interest is not tax deductible. In this instance the interest mimics the cost of credit card interest payments. If your personal loan has an interest rate that is lower than the interest you pay on your credit cards, you will save a lot of money by consolidating your credit card debt into a personal loan. As you are benefiting from the lower interest rate, you must be disciplined and not run up more credit card debt; otherwise you will end up with a personal loan payment and credit card payments.
- Unlike the no documentation mortgages that were popular not too long ago, unsecured long term personal loans require applicants to show a good credit score and provide ample documentation with respect to income, debt to income ratio, and expenses. These loans are not as easy to get as secured loans. Moreover, sometimes a lender will only extend a loan at a fraction of the requested amount. Borrowers may need to work on rebuilding their credit scores prior to applying or being approved for a long term personal loan.
