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Short Term vs Long Term Loans

Nowadays, there are many financial options. They are short term vs long term. They are constantly compared that’s why we decide to clear out the main differences between these two options.

What is a long-term loan?

A long-term loan usually involves the depositing of a large sum of money. It is issued for a year, two, five or more. The agreement implies a small rate, which is calculated monthly. Such a loan is issued mainly by banks that require a large set of documents, a surety or a pledge. Usually, it takes a lot (up to 1 month) to get a long-term loan of this form.

When is a long-term loan efficient?

Despite the fact that, as mentioned above, in some cases, a short-term loan can also be efficient, most potential clients pose a long-term loan to be more reasonable. Firstly, they opt for a long-term loan due to the possibility of issuing a greater loan amount, and secondly, a long-term loan is less stressful. It limits monthly expenditures much less. In addition, delays in payments on short-term loans usually mean fines that increase the already high amount of payments. Therefore, if you are not sure that you can repay a short-term loan with a great payment per month, select a longer repayment period with a monthly payment that you can afford.

Thus, a long-term loan is a kind of compromise between high total loan cost and a lower and more affordable monthly payment, allowing you to make a long-desired purchase. Those who select this lending option, in general, feel much more comfortable in the repayment process and are much less likely to have to pay penalties for late payments. It is for this reason that most people consider long term loans to be the most favorable option.

Since there are plenty of different lending offers on the market now – both from bank and non-bank lenders – it is very easy to get confused and select the wrong loan term. Therefore, it is important to understand that, for example, a shorter term or a lower monthly payment does not always mean a better option. To avoid this, first calculate how much you need to borrow and what the maximum monthly payment you can afford, and then determine the optimal loan term. This approach will allow you to find a loan offer that is most reasonable for you, while maintaining a balance between an affordable monthly payment and a profitable total amount of payments.

What are short-term loans?

This type of lending allows you to take a small-term loan, usually in the amount of up to $1,000. It is provided for a limited time: for a week, two weeks, a month. When issuing it, only an ID is required – in rare cases, additional documents for an individual entrepreneur may be required. The main feature of a payday short-term loans is the speed of its depositing, which varies within half an hour.

When is a short-term loan efficient?

Meanwhile, the above characteristic of a short-term loan does not mean that a short-term loan will always be the most unprofitable option when purchasing certain goods or services. After all, the shorter the loan term, the less interest you have to pay. Therefore, although most lenders try to compensate for this difference by issuing short-term loans at higher interest rates, the total amount of payments in such cases may be less than a loan for the same amount with a longer term.

If you are confident that you can handle the high monthly payments and they will not affect other necessary expenses (food, rent, utility bills, etc.), a short-term loan may be a better option. Just try to carefully plan your monthly budget, taking into account the likelihood of unforeseen expenses, so as not to get into a situation when the monthly loan payment turns out to be too high, with all the ensuing consequences.

Other differences between short-term vs long-term loans

The main differences are:

  • short-term loans can be issued by organizations accredited by the Central Banks, while not having a license. For long-term, a license is required when it comes to the bank-money-client pattern.
  • in order to borrow money for a period of 2 years or more, you will need a large set of documents and a high paycheck. Credit history will also play critical role.
  • Payday lenders are not yet able to apply to verify the identity of the borrower.
  • Qualified investors can be attracted to lenders and banks.
  • A short-term loan is issued in half an hour, approval of a long-term loan takes up to 30 working days. The same story is with the actual depositing of funds. With a short-term loan, the issuer receives money immediately; if he takes funds for a long time, he will have to wait at least a few days after the approval of the application.