Understanding the Differences Between Short-Term and Long-Term Loans

Equated Monthly Installments (Commonly known as EMIs) are used to repay loans over a specific period. The terms of which are agreed upon when the loan is taken. It can either be short-term or long-term. Take, for instance, a home that is usually a long-term commitment, while personal vacations are mostly short-term. In such a case, how do you establish which is better between short-term and long-term loans? And which one should you take for your own needs? This comparison guide will help you get answers as to whether to apply for short–term loans or long-term loans.

What are the Differences Between Short-Term and Long-Term Loans?

The first step in making the extensive, bold choice is learning what are the differences between short-term and long-term loans.

Loan Amount:

• Short-term loans equate to small amounts of principal. For example, if you take a loan to repay the fees of your child, that would be short-term.
• Longer terms are appropriate for more significant amounts of money and payback periods. Home loans are a great example of long-term loans.

Approval Process:

• Several people prefer short-term personal loans, etc., as you can get easy approvals there. You do not need extensive documentation in this case.
• The approval process for a long-term loan is usually lengthy. There is an analysis of eligibility and credit background checks, where lenders take time to approve this kind of finance.

Duration:

• The tenure for these loans is, as the name suggests, short. From 1 to 5 years is the repayment tenure for short-term credits.
• On the other hand, the tenure in the case of long-term loans can last up to 20 years. Thus, they allow an extended repayment period for long-term credits.

Collateral:

• Short-term loans are usually unsecured, and they don't require any collateral. However, that does not apply to all short-term loans.
• Most long-term credits require collateral due to high values and extended durations.

Purpose of Loan:

• Short-term loans are usually used for working capital or immediate operational needs, like getting a small piece of equipment in your factory.
• Long-term loans are used for asset purchases, business expansion, or growth strategies, such as purchasing or constructing another factory. Their repayments are aligned to income generated over time.

Credit Score Requirement:

• You can get a short-term loan even with a lower credit score.
• A major prerequisite for getting a long-term loan is a higher credit score. Be sure to check it before applying for one.

Documentation:

• Short-term loans, in contrast, are typically approved with minimal documentation.
• Long-term loans require extensive documentation due to the more significant loan amounts.

How Do Interest Rates Differ Between Short and Long-Term Loans?

Interest rates are also one of the significant factors when deciding between short and long-term loans. So, how do interest rates differ between short and long-term loans? They vary due to several factors:

• Risk: Lending over a shorter period is perceived as risky by the lender; hence, it usually attracts higher interest rates.

• Credit Score: The interest rate you are charged may also depend on your creditworthiness. Borrowers with better credit scores get loans at lower interest rates, regardless of loan term. That is why maintaining a good credit score is so important.
• Loan Amount: The other factor influencing interest rate is the borrowed amount. Some lenders offer lower interest rates for larger sums, while others have a flat charge irrespective of loan size.
• Lender Policies: Lender policies also determine the interest rates, regardless of the tenure of these loans. Comparing these prices is, therefore, so important. 
• Economic Conditions: Economic conditions affect the interest rates as well. In the case of financial instability, a general rise in interest could lead to changes in both short and long-term borrowing costs.

What are the Advantages of Choosing a Short-Term Loan Over a Long-Term Loan?

Short-term loans are often preferred if compared between the two. Why? Below are some advantages of choosing a short-term loan over a long-term loan.

• Faster Access to Funds: Short-term loans have faster approval, which enables borrowers to get money quicker than long-term loans. So if you need a loan urgently, a short-term loan is undoubtedly the better option.

• Lower Total Interest Paid: Nevertheless, short-term loans usually come with higher interest rates, but the overall interest payable throughout the life of the loan is relatively lower than long-term loans. This is due to the total amount involved in these types of loans.

• Flexible Repayment Options: You will find more flexibility in repayment terms regarding short-term loans. They can allow you to tailor the repayment schedule according to your cash flow. Meaning, more freedom!

• Build Credit Score: By repaying a short-term loan, you can significantly enhance your credit score. They enable you to qualify for future loans or credit at better terms.

Conclusion

Your choice between short-term and long-term loans is totally dependent on your financial needs and circumstances. You can enjoy faster access to funds, lower total interest paid, and more flexible repayment options when you opt for short-term loans. On the other hand, long-term loans have lower interest rates and can be used for more significant investments.

For students and young professionals looking to apply for short-term loans, mPokket is the best available online application, where you will find instant cash loans. They can be availed quickly through its app. With minimal documentation and no credit history required, it provides a highly convenient solution for loans for low salaried.