Table of Contents
What are Short-Terms Loans?
Loans that are frequently taken out for a duration of up to one year are referred to as short-term loans. These types of loans cover expenses that require immediate funds but don’t require a long-term commitment. Examples of these expenses can include medical bills, car repairs, home repairs, or other unexpected expenses.
Short-term loans are typically unsecured, meaning they do not require collateral such as a vehicle or property to back them up. As a result, interest rates on short-term loans are often more significant than long-term ones because lenders consider them riskier.
The application process for a short-term loan is usually quicker and easier than a long-term loan because the loan amount and repayment period are smaller. As a result, the lender can make a decision much more quickly. However, this also means the borrower must make their payments on time to avoid any late fees or penalties.
Unexpected expenses can be quickly paid with the help of short-term loans, but borrowers should be aware of the higher interest rates and fees associated with them.
What are Long-Term Loans?
A long-term loan is a loan that typically has a repayment period of more than five years. Long-term loans are typically used for significant investments such as purchasing a home, buying a vehicle, or funding a business expansion. These loans often require collateral, such as a house, vehicle, or business assets, to secure the loan.
Long-term loans are a great way to finance large purchases necessary for either personal or business purposes. They provide a fixed interest rate that can be paid back over several years, making the loan cost more manageable.
Long-term loans allow individuals and businesses to access the funds they need to make the large purchases they need to grow and prosper. They are used to pay off credit cards or other high-interest debts. When taking out a long-term loan, you must ensure that you can comfortably afford the monthly payments. You must make payments on time to avoid late fees, which can add up quickly.
Long-term loans can be a great way to finance large purchases necessary for either personal or business purposes.
Difference Between Short-Term and Long-Term Loans
- Short-term loans are typically repaid within a few months or up to two years, while long-term loans are usually repaid over several years.
- Short-term loans are generally used for short-term financing needs like emergency funds, while long-term loans are used for major purchases, such as a house or car.
- Short-term loans generally have a prepayment penalty, while long-term loans may not have this penalty.
- Short-term loans often require a good credit score, while long-term loans may have lower credit score requirements.
- Short-term loans may not require extensive documentation, while long-term loans typically require more documentation.
- Short-term loans usually require regular monthly payments, while long-term loans may have irregular payment schedules.
- Short-term loans can come with various fees and costs, while long-term loans tend to have fewer costs.
Comparison Between Short-Term and Long-Term Loans
|Parameters of Comparison||Short Term Loan||Long Term Loan|
|Length of repayment||have a shorter repayment period||have a more extended repayment period|
|Interest rates||higher interest rates||lower interest rates|
|Amount borrowed||involve borrowing smaller amounts||involve borrowing larger amounts|
|Collateral||no collateral required||usually require collateral|
|Purpose||used for immediate needs||used to finance large purchases|
- Short-Term versus Long-Term Interests: Capital Structure with Multiple Investors* | The Quarterly Journal of Economics | Oxford Academic (oup.com)
- Ege Academic Review » Submission » Short Term and Long Term Linkages among Nonperforming Loans, Macroeconomic and Bank- Specific Factors: An Empirical Analysis for Turkey (dergipark.org.tr)