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Long Term Loans vs. Short Term Loans

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There are so many different loan options out there that it becomes quite difficult to keep track and assess which type would be most suited to you and your needs.

Long term loans and short term loans are both great options to gratify different lending needs, but they both also come with their own set of benefits and drawbacks. So, let’s have a look at the main points for both types of loan and make an educated decision on which type of lending would be most suited to you.

What Is The Difference Between Long Term Loans And Short Term Loans?

The clue is in the name…

Whilst long term loans can be repaid over a longer term, short term loans are taken out for a period that is usually below three years, such as a payday loan.

A short term loan benefits those who are looking for a quick way of accessing cash, and in some cases, you can receive it within the same day. A long term loan, however, involves a detailed application process and a longer repayment period.

Long Term Loans

As previously mentioned, long term loans are a type of lending that can be reimbursed over an extensive settlement period. Whilst different companies have different repayment periods, a long term loan is commonly recognised as any credit agreement with a settlement period that is over a year. Examples of long term loans include car loans, debt consolidation loans, and home mortgage loans.

Want to know more? Let’s dig a little deeper and assess both advantages and disadvantages of this type of lending.

What Are The Benefits?

• You Can Borrow A Large Amount Of Money

Because the repayment period is longer, you are able to borrow a larger amount of money than you would otherwise be able to borrow with a short term loan.

• Interest Rates Are Lower

Seeing as the loan repayment period is longer, interest rates are lower than those of short term loans.

• Improves Credit-worthiness

A longer repayment term means that you have even longer to build up your credit score. Simply make the necessary repayments promptly, within the required time frame, and you will see your credit score improve. A good credit score is extremely important when applying for most types of borrowing.

Those who have a better credit score enjoy the following benefits against those with a poor rating:

  • Pose less of a risk to the lender
  • Are more likely to get accepted
  • Are usually offered a lower interest rate

• Flexibility

Long term loans tend to be extremely flexible. For example, if you are not able to pay the agreed amount for the month due to whatever reason, then you are free to carry it on to the next month if you find necessary. This is only as long as you settle the full balance before the final due date.

What Are The Drawbacks?

• You Spend More Time In Debt

When taking out a long term loan, you are also accepting that you will have to be in debt for a longer period. Debt can lead to various other issues, so make sure it is not a rash decision.

• Collateral May Be Required

Long term loans may require that you secure the loan with collateral, such as your home. Therefore, if you fail to repay the loan, you are at risk of losing something of immensely high value to you.

• Higher Total Interest

Although long term loans have a lower interest than short term loans, you will accrue a higher total interest cost overall due to the extended settlement period.

Short Term Loans

Most short term loans are borrowed and repaid in less than a year. The amount is usually small, and so they tend to come in handy to those who need a quick cash influx to tide them over until pay day or for a home or car repair.

Let’s take a quick look at the advantages and disadvantages of short term loans and decide whether or not it’s for you.

What Are The Benefits?

• Faster Approvals

If you need cash quickly, you don’t want to be waiting around for an approval. Fortunately, short term loans can be accepted within minutes and you may even be able to receive the funds into your account the very same day.

• Poor Credit Options

If you are worried about your poor credit history getting in the way of you being accepted for a short term loan, don’t!

Short term loans are usually bad-credit friendly and so there is always loans available for whoever needs one.

• No Collateral Required

It is highly unlikely that you will be asked to secure your short term personal loan with any collateral. This way, you don’t have to put any of your valued possessions or property at risk if you fail to repay the loan.

• No Long Term Commitment

In contrast to long term loans that require a long-standing commitment, short term loans do not. You can take out a loan and pay it off shortly after without having to worry about being in debt.

What Are The Drawbacks?

• Higher Interest And Repayment Periods

It is common for short term loans to have high interest rates, as well as higher monthly repayment amounts. Because of this, you should ensure that you will be the position to make the larger repayments each month.

• May Negatively Impact Your Credit Score

Although loans can improve your credit score over time if you show signs of good repayment behaviour, the impact can be detrimental to your rating if you fail to make the compulsory repayments on time.

Making A Decision

So, there you have it, long term loans vs. short term loans!

By now, I am sure you are an expert and know exactly what loan you’re looking for. So what’s it going to be?

Charlotte Ross

Charlotte Ross

Charlotte Ross is one of the leading contributors of content and all things finance at Fablious. Whether she’s writing articles, answering queries or providing her expertise for others to benefit from, Charlotte is always putting her knowledge and experience to good use. You can find her on Twitter @Charlotte_K_R

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