In this article, we will look at short term loans vs long term loans. We will examine aspects related to interest in particular. You will know all about different repayment schedules once you have read this article.

Usually, you must pay a set amount of interest on your loan. As well as paying the amount borrowed, you also have to pay back the additional interest on it. There are two main types of loans, these are short term loans vs long term loans, and each is very different to the other.

Most people think, at one point or another of the idea of taking out an online loan. If you are considering taking out a loan, you aren’t alone. Whatever the reason for the loan: whether to make improvements to your home; or make your family holiday more affordable. Perhaps it is to fix your car. You may be unsure of the best type of loan to take out. The fact is that when it comes to loans, there are an array of different options to consider and choose from. There are all of the regular loans, plus you might be eligible for a budgeting loan. You might find the process of finding a loan that is the best fit for you somewhat difficult.

Short term loans and interest costs

Short term loans span over a period of a few months to a few years – generally around three years at a maximum. Payday loans are the most common short term loans. You may take a payday loan for an emergency, such as to pay to fix your broken car. Sometimes your emergency is dealing with a household issue like flooding, or covering the cost of a flight of urgency abroad. Payday loans are somewhat like a cash advance on your monthly pay. They are deposited directly into your bank account within a couple of hours to a couple of days. They offer a quick fix when money is tight.

Long term loans span over a much wider period. People usually repay within a period of at least a few years to a few decades. People take this type of loan to cover larger payments. Larger payments might be for things like buying a house, paying for a wedding, studying at university, or starting a business. Long term loans are credit based. This means that the better your credit score, the more likely your loan application is to be accepted.

Long term loans come in two forms; secured or unsecured loans. If you want to take a secured loan, you must give an asset as security that you will repay your loan. Such collateral might be the deeds to a property you already own or the rights to your car. Whereas, if you take an unsecured loan you do not need any assets. You will need to give a deposit amount and will have a higher rate of interest.Both loan types come with a range of pros and cons which can help you to determine which is the best option for you and will be the best fit for your needs.

What are the advantages and disadvantages of short term loans vs long term loans?

To give you a better idea of what the pros and cons are of short term loans vs long term loans, below we have delved deeper into short term borrowing, such as taking out a payday loan, for instance.

Pros of short term loans:

One of the reasons that short term loans are so popular is that you can obtain them much more quickly than longer-term alternatives, such as bank loans and credit cards. Short term lenders don’t look at a borrower’s accounts like longer term lenders do. They often do a soft credit check instead of a full credit check. The borrower’s financial history is not looked into as deeply, making approval easier and quicker. Some lenders offer a two-minute application and can put the money into your account within 30 minutes.

Another reason that short term loans are incredibly popular. Even people with low-income and a low credit score can obtain them. Bank account loans and credit cards tend to be more picky to whom they will lend. So for people who are desperate for money but can’t get a longer term loan, a short term loan is often the only option.

A lot of long term loans require a deposit amount. This tends to be around ten percent of the loan value or collateral. Collateral is an asset being put up against the loan, such as your house or car. If you were to default on the payment, the lender could take this as compensation. Short term loans, however, don’t tend to require a deposit or collateral. This makes a short term loan a better option if you don’t want to risk any of your assets or can’t afford to put down a deposit for the loan.

Cons of short term loans:

One of the major cons of short term loans, especially payday loans is the fact that interest rates tend to be rather high. The reason that interest rates are so high is because of who is borrowing the money. You see people on a low-income with a low credit score are perceived as being riskier to lend to. Short term lenders charge high rates of interest because of this.

Another con of short term loans is that missed payments lead you to pay higher rates of interest as well as additional charges. Your lender might add these admin admin costs if you miss a payment one reason or another. The danger is that if you miss a payment it will most likely be because you can’t afford to pay it. Adding more money to the debt just makes your debt larger and is worse for you.

A con that a lot of people find upsetting is the fact that there is limited help available to borrowers in financial trouble. Until a couple of years ago when the FDA took over regulation of short term loans, this support was non-existent. However, now loans companies must give borrowers in trouble access to debt help of some sort.

What are the pros and cons of long term loans versus short term loans?

To help you determine if a long term loan might be the right option for you, below is a list of the pros and cons to consider.

Pros of long term loans vs short term loans:

One of the main pros of long term loans is the fact that they can be paid off slowly, over time. Most long term loans have a repayment schedule of between seven and forty years. It will be easy for you the spread the repayments out over time. This will make the loan more affordable for you. Before your lender approves your loan, you must agree on a payment schedule that is affordable for you.

Compared to short term loans, longer-term loans have much lower rates of interest. To qualify for a long term loan; applicants must meet stricter criteria. Long term lenders do not classify their applicants as high risk, so rates of interest are lower.

Having a long term loan in place can help you to build your credit score, if you can keep up with the repayments, that is. When your lender sees that a potential borrower has had a long term loan in place, such as a mortgage and kept up with their repayments, it makes them more likely to lend to them.

Cons of long term loans vs short term loans:

Although long term loans come with lower rates of interest, a con of them is the fact that you end up paying interest for longer as you might repay the loan over a period of years. You might pay less interest over a monthly basis than with a short term loan, but overall you may end up paying more.

You may find, that if you take a long term loan, your cash flow may be restricted over a longer time frame. Once you have borrowed a large sum of money, such as £200,000 for a mortgage, you then have to pay it off each month without fail. Although this will most probably replace your monthly rental payments, it will still mean that your long term cash flow may be restricted.

Most long term loans have a fixed date when the amount has to be paid back without fail, else the lender can take your collateral, deposit, or repossess your home. So although you make payments over an extended period, there is a fixed date that the amount must be cleared by. You do not have that much flexibility with the deadline for the final payment.

Conclusion – short term loans vs long term loans

There are both pros and cons to the two most common loan types – Short term loans vs long term loans. You may struggle to select the perfect one for your situation and needs. There is a financial ombudsman in the UK who can help you if you have complaints when taking out your loan and do not know what to do. Hopefully, the pros and cons above, explaining short term loans vs long term loans will make the process of choosing a loan a little easier for you.

Felicity Jones
Felicity Jones is the founder of the Payday Loans Net blog and has been working tirelessly to produce interesting and informative articles for UK consumers since the blog’s creation. Felicity’s passion is travelling. She loves her job because she can do it from anywhere in the world! Whether inspiration hits her while sitting on the balcony of a French B&B, or whether she is struck with an idea in a roadside cafe in Moscow, she will always make sure that the idea comes to fruition. Felicity’s insights come from her knowledge gained while completing her degree in Economics and Finance as well as from the people she meets around the world. Her motto is: Everyone you meet has something valuable to teach you, so meet as many people as you can!

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