What are long-term unsecured loans?

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A long-term unsecured loan is a type of financing program that requires no collateral and provides a longer repayment period than other unsecured loans. In the consumer loan arena, unsecured loans are often called signature or personal loans.

With both commercial and consumer unsecured loans, the description “long term” is a relative term. For example, the primary type of short-term personal loan available to consumers today is the payday loan, sometimes called a cash advance loan. These payday loans are usually paid in full on or about the borrower’s next scheduled pay date, or within 30 days. Similarly, the average pawn shop loan (which is secured) also has a 30-day term.

In comparison to such short terms, unsecured personal loans with a repayment term of at least one year are often considered long term.

Compare this with the mortgage loan industry, in which a short-term mortgage term would be five or ten years.  The typical long-term mortgage loan has a 30-year amortization and term.

Types of long-term unsecured loans

There are some who believe that there is no such thing as a truly unsecured loan, when the borrower’s credit is on the line for the loan. But in general, when consumers think of long-term unsecured loans, they usually have personal or signature loans in mind.

As unsecured loans, these financing programs require no collateral – except for the borrower’s signature on the loan agreement. Contrast the signature loan with secured types of personal loans, such as automobile title loans and pawn shop loans. These secured loan programs require an item of value as collateral for the loan. With pawn shop loans, the collateral is typically some sort of personal property. With automobile title loans, the collateral is the car title.

The typical long-term personal loan is usually structured as an installment loan, which requires periodic payments throughout the life of the loan. The loan agreement or promissory note establishes the installment loan’s payment period, which can be monthly, weekly, biweekly or even quarterly.

The payments on long-term unsecured loans are also typically amortized. Amortization refers to the calculation of loan payments so that the principal is paid down over the amortization period. The monthly payments on an amortized loan cover all the interest due for that period, as well as a portion of the principal balance.

The first payments will be primarily for interest, with a little bit toward principal. However, as the principal balance decreases, the interest charges will also decrease. With less interest each period, the amount going toward the principal balance increases. On the last installment payments, most of the payment amount is going toward principal, with only a small percentage going to interest charges.

Types of unsecured loans and personal financing

Besides standard personal loans, the other common types of unsecured personal financing are credit cards. Although credit cards are a form of revolving debt, they are also a type of personal financing. The difference between credit cards and standard personal loans are further blurred when the credit card holder takes out a cash advance against his or her credit card line. The borrower then gets cash that is not secured by any collateral.

Although revolving accounts like credit cards are usually not structured for long-term borrowing, they can and sometimes are used that way. It’s not recommended, but many consumers do maintain a large balance on their credit lines for a long period. It’s important to keep in mind, however, that carrying a balance on a credit card can be risky. It has the potential of lowering one’s credit scores and can be expensive.

Regardless of which long-term unsecured loan program is used, borrowers need to do their research and due diligence. It’s always important to examine all loan options and speak with a knowledgeable financial advisor before agreeing to any loan or financial obligation.

Disclaimer: NetCredit is a direct personal loan provider and does not provide financial advice, nor does it vouch for any vendor or service mentioned on our NetCredit personal finance blog or online consumer loan glossary. Always research and perform due diligence on any service provider or vendor before deciding to use them, and we recommend that you speak with a financial advisor regarding all decisions that will affect your finances.

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