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Short Term Loans vs Long Term Loans


Short term loans and long term loans are in practice based around the same concept: borrowing money from a lender and repaying over an agreed timeframe, with an agreed set of terms and conditions. However, although they are both popular forms of finance that many online lenders provide, they do have a number of distinct differences in practice.

If you are looking for a loan and looking to borrow money instantly online it is best to understand the differences between these two types of loans so that you understand which one you should pursue for your specific needs and requirements. It is important to understand before this guide begins that not all loans are the same. For example, not all short term loans come with the same terms and conditions and long term loans may have different lending criteria attached to them. It is always vital to check with your lender the terms and conditions of your loan so that you understand when and how much money needs to be repaid.

If you think you will struggle to repay your loan that it is worth looking at alternatives to loans such as borrowing money from family and friends. This guide will take you through what short term and long term loans are and the similarities and differences between them.

What Are Short Term Loans?

Short term loans take place over a small period of time and are usually for smaller amounts. Many different types of short term loans may be offered by the same lender, with shorter term loans generally being repaid over a period of time of up to 3 to 6 months. When it comes to short term loans, they will usually be required for an immediate need, such as to pay urgent medical expenses, pay off pressing bills or pay for an emergency like a broken down car or work vehicle like a truck or van.

Exactly what a short term loan can offer you and how much you can borrow will also depend on which state you are in, with some states like New York banning payday loans altogether. Other states allow short term loans and personal loans, but regulate the terms and conditions of the loans and what they can offer.

Examples of short term loans include:

Short terms loans are usually paid back to the lender in just a few months or sometimes within the year of receiving the money. There are associated with the idea of needing quick but small amounts of money for an unexpected cost such as car repairs or veterinary bills. Short term loans can vary in terms of amounts, time in which the money should be repaid and other factors so it is always important to do all the necessary research to understand what you are applying for before you do.

When applying for a short term loan, the lender will do a credit check on your financial history and if you have bad credit they may decide to increase the interest rates on the loan. There are also strict criteria that you must satisfy to be eligible for any short term loan. These include having a regular income of at least $800 per month and ensuring all applicants are US citizens with valid ID.

What Are Long Term Loans?

Long term loans are often used for much larger sums of money repaid over a much longer period of time. Examples of this are a home purchase loan, personal loan or a secured loan and run-of-the-mill mortgages. Longer term loans will also more often be secured against a high-value asset like your home or car (for example in the case of title loans in the USA). With long term loans, because they are often for larger amounts, the lender may look to reduce their risk level. This is done by the borrower securing the loan against a high value asset. Therefore, if the borrower declares bankruptcy for example and cannot make their repayments on the loan, the lender can seize the asset as compensation.

Examples of loans more likely to be long term loans include:

  • Mortgages
  • Title loans
  • Business loans

All of these loans can, over the long term be repaid to the lender, which may be a high-street bank or an online loans provider over a period of up to a number of years. You are more likely to be accepted for these loans if you have a good credit history, can prove that you will be able to make repayments and have a regular income which you can prove to your lender. It also helps if wherever necessary you can use a high-value asset as security on your loan.

These types of loans are used for people who need a large sum of money to make a very large purchase such as a house and depending on your financial situation you may be able to borrow up to $50,000 with a long term loan, sometimes more.

Interest rates will vary depending on both the lender and your individual financial history and circumstances, as with any type of loan it is vital to do your research into what type of long term loan and how much it would be sensible to borrow before going ahead and applying for a loan (which might affect your credit score).

What Are The Differences Between Short Term Loans and Long Term Loans?

The main difference between short term and long term loans is the amount issued to the person and the amount of time over which this has to be repaid.

It is harder to get a short term loan for more than $1,000, although it is possible, and these short term loans will nearly always be repaid within a few months of taking them out. Payday loans get their name from being repaid to the payday lender on your next payday, usually within a month of taking the loan out. Installment loans on the other hand can be a short term loan option, but will typically be repaid over 1 to 12 months.

Long term loans are usually for much larger amounts and can be repaid over a number of years with smaller monthly or bimonthly payments sent to the lender to repay the loan plus interest added.

Another difference between the two, is the ease in which you might be approved. It is often easier to be approved for a short term loan than a long term loan, because it is a smaller amount of money, lenders will often not do as stringent background checks. Many online lenders operate in the high-cost-short-term loans (HCSTLs) space which means that the loans can be provided faster, often on the same day, but at a higher cost.

This does mean however that short term loans have much less flexibility when it comes to interest rates and the APR will almost always be very high when it comes to short term loans. Long term loans can also take a lot longer to come through than short term loans as the application process is much longer and lenders may need more information from anyone applying for a long term loan.

What Are The Similarities Between Short Term and Long Term Loans?

There are some similarities between short and long term loans too. Both types of loans have to paid back to the lender with interest added within the time limit agreed upon between the borrower and the lender. If repayments are not made on time then the borrower can incur extra charges including late fees and can see their credit record damaged for non-payment. Then, if they continue not to pay they may even face court for not repaying the loan.

In both cases many borrowers will opt for smaller monthly payments rather than repaying the loan in one large lump sum.

Should I Get A Short Term Or Long Term Loan?

This depends on your circumstances. For example, if you are in the military and require some additional money in between tours, you may choose a short term loan, whereas if you are a homeowner with a good credit record you may go for a longer term loan.

If you need to borrow a small amount of money over a shorter amount of time to pay an unexpected charge such as a car repair, it may be that you choose to go for a short term loan such as a payday loan or installment loan. However if you are looking to put a deposit down on a house and you need a much larger loan, it may be worth going for a long term loan.

Always be do your research into what type of loan is best for your circumstances and always make sure that you will be able to repay your loan on time so that you do get caught in any unforeseen problems.