Everything You Need To Know About Short Term And Long Term Loans

February 19, 2021

When it comes to researching and choosing the best loan for you and your financial situation, the amount of information can be overwhelming. There are several types of loans to choose from and with lenders offering a range of specifications, you would be forgiven for being a little confused. To help, we have put together this guide with everything that you need to know about short term and long term loans to support you in making an informed decision.

What are short term loans?

Short term loans are a type of loan that are agreed to support a business capital or a temporary personal need. Short term loans typically involve lower borrowed amounts and tend to be suitable for individuals with a temporary, sudden financial problem, such as car repairs or a broken boiler. Usually, the repayments for these types of loans are within a year, but most have terms of up to 18 months and anything longer than this can be considered a long term loan.

Types of short term loans

There are several different types of short term loans that are available, including:

  • Payday loans – these are emergency short term loans that must be paid back in one lump sum, usually when the borrower’s payday arrives.
  • Lines of credit – these are similar to using business credit cards. A credit limit is set and a borrower can tap into the line of credit as needed, then make monthly instalment payments against whatever amount has been borrowed.
  • Merchant cash advances – this is a cash advance that operates like a loan. The lender loans the amount needed and the borrower makes the loan payments by allowing the lender to access the borrower’s credit facility.

Short term loan advantages & disadvantages

There are many advantages for securing a short term loan, but one of the top benefits is that they are easy to acquire. If you are in a hurry to obtain some money for an emergency, the requirements for short term loans are usually easier to meet and quick to get hold of. They also have a much shorter time to incur interest and a quick funding time, making them a highly popular choice.

The main disadvantage of short term loans is that they only provide smaller amounts of money, so if you need a larger amount of cash, a short term loan isn’t the best choice.

What are long term loans?

Long term loans are the opposite of short term loans, so they can be paid off over a term that is longer than a year and usually involve borrowing a larger amount of money. It is not uncommon for a long term loan to be secured against a personal asset, such as a house or car, so if you fail to meet monthly repayments, your collateral could be repossessed. However, if you are confident about paying back the loan, this is a great option for applicants looking to make large purchases or investments.

Long term loan advantages & disadvantages

Long term loans are highly flexible, offering you a larger amount of money to borrow and a longer time to repay, depending on your needs. They also offer the possibility of lower interest rates than short term loans and can provide lower monthly payments, thanks to their longer repayment term.

However, while the idea of lower monthly payments may be good, the interest rate on long term loans mean that you may end up paying more than you expected overall. You may also be charged for early repayments, which is something you should clarify before signing a loan agreement.

Hopefully, this comparison between short term loans and long term loans is able to help you reach a decision on the type that would be best for you.

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