There are certain situations and in life when you may be forced to borrow money. It may be a medical emergency, student loan, personal loan, for your small business, house, auto, or even travel plans. When it comes to getting loans, there are two basic options – short term loans and long term loans.
Obviously, the short-term and long-term refer to the time period in which a loan must be paid back. But are there other differences between the two? Which one is better? Which is best for you? Choosing between the two can be daunting, as it’s an important financial decision. Fortunately for you, we have compiled everything you need to know about short term versus long term loans.
Short-term vs. Long-term loans: how are they different?
Short-term and long-term loans vary in the length of their term. However, there are also some less obvious differences between the two as well, such as loan amount, requirements for eligibility, interest rate, and more.
In any form of credit, borrowers will need to pay the capital amount plus interest, over a set period of time. Interest may be compounded regularly, especially for loans to be repaid for extended amount of time.
Short-term loans are pretty fixed; they are paid usually within a few months or a year (or a little longer). Obviously, long-term loans are paid for a longer period of time. It can last for a few years, say 5, 10, or even 15 or even 25 years.
Short-term loans are usually used for quick money and in small amounts. They are generally associated for personal temporary or corporate assets. Some examples of this are peer-to-peer loans and cash advance loans.
Long-term loans, on the other hand, involve larger amounts of money. They are usually used for long-term use, such as home purchase.
On the other hand, there are also loans that can be somewhere in between, such as car loans. Transactions for car loans can be either smaller or larger arrangement.
For most people, short term loan is the way to go. Lenders can provide you with the money quick and hassle-free. Some can even provide 24-hour approval for the loan application. It’s almost impossible to find this kind of quick approval for long-term loans.
The lower amount of short-term loans makes them easier to pay and get out of debt quick. It’s a good option to overcome financial setbacks and great quick solution to financial needs from unforeseen circumstances.
Mortgage and business loans that require large amount of money are two common examples of long-term loans. This requires multi-year repayment terms, which may last for decades.
Though long-term loans have lower rates interest rates than short-term loans, people who take on long-term financing will usually end up paying more interest throughout the repayment period. The longer the term, the higher the compounding interest charges may become.
And since it involves large amount of money, it is generally more difficult to get approved for long-term loans. Lenders will want to make sure their borrower will have capacity to pay and fulfill the payment terms.
This term is usually best for business owners or anyone looking to make a significant financial investment.
How to choose the right one for you?
As said earlier, the most obvious difference between the two is the length of the payment period. Generally, the bigger the loan amount the longer time it needs to repay. There are, of course, some exceptions.
While it may seem that the long-term may be more desirable than the other, the reality is, the type of loan you want might not be the best fit for you at the moment. While high capital, low interest, long-term loan may be enticing, a short-term loan may be the best for your situation.
The payment period for long-term loans can be a bit tricky to define, as it depends on the lender you work with, your financial status, your intended use for the money, and of course, the loan program.
The best way to determine which one is right for you is to understand why you’re borrowing the money. How much money do you actually need? How much interest are you willing to pay? How long do you think you can pay the loan back?
What do you need the money for?
If you’re borrowing for urgent and immediate use, say a medical emergency, then short-term loan is the way to go. However, if the medical emergency requires large sum of money, say an immediate surgery, then you might want to consider a long-term loan.
If you’re looking to purchase a real estate property, new car, or expensive appliance, then a long-term loan may be the right one for you. Depending on the amount of money you need, you can get a long-term loan for this purpose for up to 60 months with minimal interest.
If you’re looking to invest in a business, or finance you existing business, then a long-term loan may be the way to go. They come with friendlier terms to help you manage your finances better and keep your business running. This is a great strategy for starting a business, since earnings will still be unstable in the beginning.
How much money do you need?
Much like the first question above, this depends on your situation. If you’re buying a property, say a new house, then that it will obviously require bigger amount of money, longer time to process the request and complete the documents than an urgent medical emergency. The same goes with investing in a business that needs significant capital, or putting money to supplement the operation of your existing business.
If you’re borrowing money for a new car, then you can get short-term loan. Subsequently, it’s never a good idea to drown yourself into a long-term debt for the latest smartphone.
How much interest are you willing to pay?
The usual interest rate for unsecured personal loan can go from 5 to 35%. Banks and credit unions usually offer more competitive rates. As of late however, online lenders offer the cheapest rates, especially for qualified borrowers.
As with most financial decisions you will do in your life, credit score will absolutely affect your loan application. Some lenders use it to determine your interest rate too.
Since you have to pay quicker for short-term loans, they usually come with lower interest rates than long-term loans. Long-term loans are riskier for the lender, that’s why they come with higher interest rate. Subsequently, this is why borrowers with good credit score can get lower interest rate, as they are deemed trustworthy by the lenders.
Unfortunately, borrowers don’t have much to say when it comes to determining the interest rate. Your best option is to compare multiple lenders to see which one has the best offer.
How long can you pay the loan back?
As much as you want to get an affordable monthly due, you don’t want to pay off your mortgage until your retire, right? More importantly, you don’t want your children to inherit your loans. That’s why it’s important to have a good look of your future. Are you going to have the same income in the next 5 or 10 years? Will you be able to pay your monthly obligation to your lender throughout the payment term? If yes, then go for it. If not, then you may want to opt for a more substantial repayment of shorter term and smaller interest. Shorter interest will help you get out of debt quick.
Unlike short-term loans, long-term loans require smaller monthly payments. This is because the interest is spread throughout the period of the term. However, since the interest is compounded, you will end up paying higher interest in total at the end of the payment term.
The best way to go about this is to shop around. Different lenders are best for different loan purposes. As a matter of fact, there are many lenders that specialize on specific loan types, such as personal loan, business loan, car loan, home renovation loan, medical emergency loan, etc.
So which one is the best for you? Well, only you can answer that, as that depends on your financial circumstance. Generally, long-term are considered more desirable than short-term; you’ll get larger amount of money and more time to pay it off than its short-term counterpart. However, they’re tougher to qualify. Also, you may need a good credit score, especially for longer amount of money. Conversely, short-term is best for people who don’t need to borrow large amount of money and pay for a longer period of time.
FAQs on Short Term Loans vs Long Term Loans
- What qualifies as a long term loan?
- What can I use a long term loan for?
- What is a long-term personal loan?
- How does interest work on a long-term loan?
- How much can I borrow with a long-term loan?
- Is a long-term loan better than a short-term loan?
- Are these loans secure or unsecured?
- What are the other fees and charges on the loan?
- Why should I take out a long-term personal loan?
- What are the common pitfalls of short term loans?
- What are the common pitfalls of long term loans?
- How do you apply for a long term loan?
- What are the differences of short and long term loans?
- How does Money Pig help with short and long term loans?
What qualifies as a long term loan?
A long term loan is any type of loan that must be paid off over a longer period of time whereas short term loans are to be paid off within a year or less. It is typical of a long term loan to have a repayment period of at least three years. For this reason, this type of loan is suited for bigger purchases or expenses such as housing, renovation, purchase of a vehicle, or for business use. The longer term is often designed in order to make the monthly payments easier to afford for the borrower. The lender will be the one to set the length of the term and the corresponding interest rate.
Most lenders have a maximum repayment term of 20 to 30 years. It typically varies according to the type of loan and the amount borrowed. There is an option to repay the loan earlier, though, especially if the borrower has the capacity to do so.
What can I use a long term loan for?
There is no distinctive rule as to what you can use a long term loan for. Just like a personal loan, you can use it for any purpose you deem fit. You can use it for a business purpose to finance present and future expenses, or as capital for a new business startup. For businesses looking to expand, this is also a good source of funding.
You can also use a long term loan for debt consolidation if you want to pay off existing multiple debts. This type of loan is also suited for home improvement if you want to renovate your kitchen or other rooms in the house, or you want to extend or convert it into a loft.
Any other endeavor that you might have that would entail a huge cost would be a good purpose for a long term loan since you can get a larger amount of money (versus short term loans).
What is a long-term personal loan?
This is any kind of personal loan that is payable in a longer term than most other types of loans. This type of loan also often involves a large amount, which is the primary reason for extending the term of the loan. To make up for the longer repayment period, you will have to incur a higher interest rate for this.
How does interest work on a long-term loan?
Long term loans work the same way as any other loans in the market. You can choose between variable or fixed interest rates. There are certain pros and cons associated with each option.
With a fixed interest rate, you can get the same interest rate on your loan throughout the duration of the loan cycle. It does not matter if you pay off the loan early or if there are changes to the economic condition, the interest rate that you have to pay will stay the same. This is a good option if you want to ensure predictability in your cash flow. With a fixed interest rate, you know exactly how much you are going to pay for the loan per month.
On the other hand, a variable interest rate could change depending on the conditions of the market. There is a possibility that the interest rate will go down but there is also a risk that it could go up. If you don’t mind the volatility, then you can go for this type of interest on your loan. If not, then it is best to opt for the fixed interest one.
How much can I borrow with a long-term loan?
It depends on your credit rating and evaluation because lenders will use that information to determine the amount that you can borrow. There are also several other factors that can be considered when calculating the loanable amount for each qualified borrower.
On average, long term loans range from $10,000 to as much as $50,000. Again, the amount that you can borrow will be based on the purpose of the loan, your credit score, and the agreed loan terms. Make sure that you assess your own financial status over the next few years (or at least within the repayment period) so you can determine if you can afford to pay off the amount loaned.
Is a long-term loan better than a short-term loan?
It depends on your situation and financial need. A short term loan is better if you need a small amount of money for immediate purpose such as to pay off home repair or emergencies. But if you have a more substantial project such as expanding a business or renovating your home, then a long term loan is what you need.
It is also important to do a thorough comparison on the APR or annual percentage rate for the interest on the loan. This will vary from one lender to another so a little research can go a long way in terms of the total amount of the entire life of the loan.
Are these loans secure or unsecured?
This will vary based on which lender you choose to borrow from. If you can secure your short or long term loan, either with your home or any asset of value, then you can lower the interest rate on your loan. On the other hand, secured loans carry the risk that you might end up losing your home or any item you placed on collateral if you are unable to pay off the loan.
What are the other fees and charges on the loan?
When you take out a short or long term loan, always take the time to read the full contract. There will be details on the fees and charges associated with the loan. Aside from the interest rate and the closing cost, there might be penalty charges if you fail to make payments on time, or if you do not pay at all. It is important to know what these charges and fees are as they can quickly add up over time to make your loan more expensive than it actually is.
Why should I take out a long-term personal loan?
The primary reason to choose a long term personal loan is to lower your repayments. As mentioned above, lenders allow you to extend the life of your loan in order to make the monthly payments more affordable. This will give you more flexibility when it comes to handling your finances in the future.
What are the common pitfalls of short term loans?
There are many benefits that you can get when you take out a short term loan. But there are also pitfalls that you should try to avoid. One of them is taking out too many loans at once. Short term loans are designed to be paid off in a short amount of time such as a few months to within a year.
Most lenders that offer this type of loan also provide quick approval with some releasing the amount within 24 hours. It is easy to get tempted to borrow as many short term loans as you can get approved for. However, you need to refrain from this practice as it can result to having excessive debts. You need to focus on one loan at a time and then only get a new one if you need to, or if the previous ones had been paid off.
What are the common pitfalls of long term loans?
The most common pitfall of obtaining a long term loan is that you will have to pay an excessive amount of fees and charges. Since lenders are giving you the privilege of paying off the loan over a longer period of time (such as up to 20 years), they need to make money out of it. And in doing so, they charge a higher interest rate, or charge you with excessive fees (such as insurance, origination fees, settlement charges, late charges, or pre-payment penalties) to make money off of your loan. It is important to read the fine print on your contract so you know what fees and charges to expect.
How do you apply for a long term loan?
As with any type of loan application, you must supply the documents required by the lender such as personal information, proof of employment, proof of income, proof of residence, and credit history. These documents will provide the lender with information they need to determine if you can qualify for a loan.
What are the differences of short and long term loans?
Both types of loans are the same in terms of the processes involved and the purpose of the loan. Therefore, their main difference lies in the length of the repayment period. Short term loans must be repaid in a few months to a year. Long term loans can be repaid for up to 20-30 years, depending on the amount you owe.
How does Money Pig help with short and long term loans?
We can match you with a panel of top lenders in the UK providing short and long term loans. Whatever it is that you need, we can help you get the funding you deserve. By matching you with the right lender, you can get approved for a loan easily!