Short Term Loan or Long Term Loan? Know the Real Differences

When people try to compare two types of loans, they’re usually trying to look at the comparative risks of both. Of course, it’s very rare indeed that two types of loan can be fairly compared in such a way, due to how unique everyone's situation is bound to be. The same applies here when comparing the (admittedly very broad) categories of short term and long term.

A short-term loan tends to describe a loan that will be paid back over the course of maybe three years. But it can be as short as a few months. Long-term loans see the borrow pay the money back over a decade, or even two decades.

Considering the lender

The outcome of loans tend to rely on the confidence of the lender. They require confidence that the financial status of the person to whom they’re lending money won’t be changing any time soon. It also requires a certain sense of confidence in the general economic climate. When it comes to short-term loans, the lender (assuming they’ve assessed you as a safe bet) is confident that they’ll get the money back soon. It’s seen as less of a risk for the lender.

Long-term loans, however, sees the lender put themselves in a riskier position. A long-term loan means that the agreement will last a period of 10-20 years - and a lot can happen in that time. Most people experience job loss, marriage, divorce, deaths, financial gains and financial losses in such a span of time. You could both be in for a bumpier ride!

Flexibility and safety

Many people who need to take out a loan are looking for quite substantial sums. But they’re also not likely to have assets that can provide them with an easy way out should something go wrong during the loan period. This doesn’t, however, mean that they’re completely locked out of the long-term options. It does mean that they’ll pay slightly higher interest rates. (Although some short-term loan interest rates can exceed these.) And homeowners may have to put their home down as equity in case the payments can’t be made within the agreed period.

But the reason people will go with long-term options like secured loans is because there is a lot of flexibility when it comes to payment options. And many people who need larger amounts of cash need precisely that - flexibility!

Overall cost

The argument that many people provide in favour of short-term loans is that the overall cost is much lower. Interest rates aren’t as high when you go for options that need to be paid back within a few years. This has much to do with the aforementioned sense of lower risk on the part of the lender.

But the amount of money you can get from a short-term loan is nowhere near as high as what you can get from the long-term loan. And, at the end of the day, it’s the amount you need that will decide which option you should go for. Your income and your credit rating, of course, will also play a large part. Whatever you do, don’t take out a loan unless you’re 100% confident you’ll be able to pay it back. Be it in three years or twenty, returning the money is the priority.