What Is the Difference between Short-Term and Long-Term Loans?

The thought of a loan might have crossed your mind at some point in your life.  Generally, most people don’t take time to think about the numerous loan options available out there before they make a decision. A loan is a specified amount of money that you borrow from an individual or financial institution with the intention of paying it back with interest.

There are lots of different types of loans that exist out there. However, all loans can be classified into two broad categories; short-term loan and long-term loan.  Although this classification is based on the period in which the loan is to be paid back, there are other differences between short-term and long-term loans. Here are some of the key differences between these two types of loans.

Short-Term Loans

Any loan that is taken for a period not exceeding three years is referred to as a short-term loan. A common example of a short-term loan is the payday loan which you can easily apply for when caught up in a financial emergency. A payday loan is a quick cash loan that offers you financial aid to deal with a financial crisis and puts you under the obligation to repay the principal amount plus all the accrued interest on your next payday.

Several lenders offer payday loans to anyone, including individuals with poor credit scores or no credit history at all. Another good example of a short-term loan is the installment loan. The risks involved in short-term loans are lower, and it is always easy to get a short-term loan compared to a long-term loan.  Generally, people go for short-term loans to meet a sudden financial requirement. It is also good to note that you can only borrow small amounts of money with a short-term loan.

Long-Term Loans

A long-term loan is usually taken for more than three years. The most popular types of long-term loans include mortgages, auto loans, business loans, and education loans. Long-term loans are regarded as high-risk loans, and that is why lenders always conduct extensive credit checks on a potential borrower before accepting or rejecting their loan application.

The financial institution relies on the credit scores and credit history to determine the interest rates for a particular individual. Typically, a good credit rating usually implies a lower interest rate. Long-term loans can be classified as either secured or unsecured.  A secured long-term loan requires the borrower to provide some form of security as a backing of his/her credibility in repaying the loan on time.

On the other hand, a long-term unsecured loan doesn’t require the borrower to provide any collateral, but the interest charged on the principal amount is high owing to the enhanced risk on the part of the lender. The application process for a long-term loan can be time-consuming, tedious, and stressful. It may take months for you to know whether your loan application was approved or rejected. In most cases, individuals go for long-term loans if they want to invest in long-term future projects.