Short Terms vs Long-Term Loans
Clients of microfinance organizations can apply for both short-term and long-term loans. What is their difference and what loan is the best to get? You will find the answers in this article.
Where and how to get a loan?
Today, loans are issued by two main types of institutions: banks and microfinance organizations (MFIs). They offer loans for long and short periods.
These loans have the same essence: getting money for different purposes, but these financial products are actually different. The differences between long-term and short-term loans are significant and must be considered when choosing a financial product.
What is a long-term loan?
A long-term loan is a form of loan that is paid off over an extended period of time greater than 3 years. The lending period can be anywhere between 3 to 30 years. Auto loans, mortgages and certain personal loans are examples of long-term loans. Such loans come with a fixed repayment schedule with either a fixed or floating interest rate.
What is a short-term loan?
Short-term loans require quick repayment. Those who borrow short-term loans typically pay them off on a daily or weekly basis. Examples include credit card, bank overdraft, trade credit, payday loans, etc. They are often extended loans at very high interest rates. Loan terms often do not exceed 1 month. A short-term loan is a useful service, especially for small businesses or start-ups that do not yet qualify for a credit line from a bank. Loan amounts may range from $100 to as much as $1,000.
What is the difference between a short-term loan and a long-term loan?
Long-term loans may involve collateral or real estate. To apply for such a loan, you will have to provide a lot of identity documents, confirming the ownership of the collateral and your own solvency.
Short-term loans come with higher interest rates and the minimum number of documents required for processing. Short-term loans can be obtained online. Online payday loans have recently become the most popular financial service in the USA.
If you decided to take out a loan, you need to make the right choice. To do this, you need to know at least the main differences between the available loan options in order to get the most benefit. The financial market offers various contracts: with different terms, loan amounts, obligations. The difference between them may be too significant, as well as the difference in the conditions.
Let’s compare these 2 loan products:
|Feature||Long-term loan||Short-term loan|
|Speed of funding||A few days||Same day|
|Loan amount||Almost unlimited||$100 – $1,000|
|Contract term||Several years||7-30 days|
|Eligibility criteria||Tough||Relaxed (only an ID is needed)|
|Application||Up to a month||15 minutes|
|Credit rating accepted||Good||Any|
|Minimum age||21 years||18 years|
|Interest rate||8.90% – 12%||8% – 13%|
What is important to consider when applying for a loan?
When applying for a loan, you must critically assess your financial condition, taking into account possible difficulties (illness, dismissal, etc.). Short-term loans are easy to access and repay. Long-term loans are less predictable, so pay close attention to the loan term.
Experts say and practice proves: the optimal monthly payment with a stable income is equal to 25% of your income (not 40% or 50%). Under such conditions, the loan will definitely not be fatal for the family budget.
If you need a small amount for emergency expenses, it is convenient to take a short-term loan. If you need a large amount, consider getting a long-term loan: look for offers with the lowest interest rate and carefully read the loan agreement.