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🧾financial accounting i review

Long-term loans

Written by the Fiveable Content Team • Last updated September 2025
Written by the Fiveable Content Team • Last updated September 2025

Definition

Long-term loans are financial borrowings that have a repayment period extending beyond one year, often used by individuals and businesses to finance significant investments, such as purchasing property, equipment, or funding expansion projects. These loans typically feature fixed or variable interest rates and require regular payments over the life of the loan, making them a crucial component in managing long-term financial obligations.

5 Must Know Facts For Your Next Test

  1. Long-term loans are often used for significant purchases or investments that require substantial capital, such as real estate or large equipment.
  2. These loans usually come with lower interest rates compared to short-term loans due to the extended repayment period.
  3. Repayment terms for long-term loans can vary widely, typically ranging from 5 to 30 years depending on the type of loan and the lender's policies.
  4. Many long-term loans require collateral, which provides security for the lender in case of default.
  5. Long-term loans impact a borrower's credit score; consistent payments can improve credit health, while missed payments can have negative effects.

Review Questions

  • How do long-term loans differ from short-term loans in terms of structure and purpose?
    • Long-term loans differ from short-term loans primarily in their repayment duration and typical usage. Long-term loans usually have repayment periods exceeding one year and are used for major investments like real estate or business expansion. In contrast, short-term loans are generally repaid within a year and are often utilized for immediate financing needs. This structural difference influences interest rates, collateral requirements, and payment schedules.
  • Discuss the implications of using long-term loans on a company's financial strategy and capital structure.
    • Using long-term loans can significantly impact a company's financial strategy and capital structure by allowing it to invest in growth without immediately depleting cash reserves. These loans help firms leverage their equity and manage cash flow effectively while facilitating larger investments that might otherwise be unattainable. However, relying too heavily on long-term debt can increase financial risk and lead to higher interest expenses, which necessitates careful consideration of optimal debt levels.
  • Evaluate the potential risks associated with long-term loans and how they might affect a borrower's financial health over time.
    • The potential risks associated with long-term loans include interest rate fluctuations, repayment difficulties if cash flow decreases, and the impact on credit ratings if payments are missed. As these loans extend over several years, borrowers must ensure their financial stability throughout the term to avoid default. Additionally, excessive borrowing can lead to increased debt-to-equity ratios, limiting future financing options and possibly jeopardizing long-term financial health.