Long-term loans can be found in several variants. End users are most familiar with long-term loans from mortgage lending. Hardly any property is financed with a loan of only five years. However, consumer financing through long-term loans is rather the exception. Long-term loans are much more common in the economy than in private households.
Even if the fixed interest rate for a real estate loan was agreed over a period of only five years, a complete repayment rarely takes place. Construction loans generally have terms of up to 35 years and are therefore practically without exception considered to be long-term.
Private consumer loans usually have terms of up to 72 or 84 months. However, some banks are starting to offer maturities of up to 120 months. In such constellations, consumer finance is also provided through long-term loans, which is more of an exception.
In the economy, long-term loans are used to finance long-lived assets and to adjust the loan term to depreciation. For long-term loans, collateral, such as land charges, is often required from banks.
What is the only viable option for construction finance also applies to investment finance. The machine to be financed can rarely serve as full security. Should the loan be non-performing (ie not repaid), the realization of a property is much easier than selling the financed production plant.
A classic form of long-term borrowing is the issuance of a bond on the capital market. However, this path is closed to small and medium-sized companies because they do not have the necessary capital market ability. As a result, they are dependent on long-term bank loans for larger investments.
The long-term also implies a relatively lower repayment than a short-term loan. Again, this is important because small businesses rarely have the liquidity to repay large-volume loans in a short period of time. Mostly, this target group supports public banks in borrowing, since commercial banks and savings banks place high demands on creditworthiness for long-term loans.
Promissory note loans also fall into the long-term loan segment. These are large loans from industry, which are taken out against the promissory note without the involvement of the stock exchange. The buyers of these promissory notes are capital collecting points such as pension funds or insurance companies who want to invest capital in the long term. A promissory note is not a security, but a document that serves to preserve evidence when in doubt.
Bonds – including bonds – are long-term loans that are also traded on the stock exchange. The issuers are capital marketable companies and the public sector. Federal bonds often have terms of ten years or more, US government bonds are also issued with a term of up to 30 years. In contrast to promissory note loans and industrial financing, bonds as a third variant of long-term loans are also known to private investors from their investments.