The choice between long-term and short-term loans is often one of the most important decisions that must be made before applying for a loan. However, for most people, especially those who have never obtained a loan, it is difficult to understand which of these types of cash loans is the most suitable and profitable. In this article, we will examine the main differences between short-term and long-term loans, as well as in which situations each of them is more profitable in order to facilitate the process of choosing a suitable loan.
What is a short term loan?
As the name implies, a short-term loan has a short maturity. Usually, this term means loans that must be repaid in the period up to one year. However, often the repayment term of short-term loans is even shorter – loans can be issued for up to 30 days. For this reason, short-term loans are rarely issued in large amounts, most often from a couple of hundred to a thousand dollars. As a rule, requesting them is much faster and easier – short-term loans can be processed in just 15 minutes, because lenders do not carry out in-depth checks on their credit history, as is the case with long-term loans.
Given the above, it is not surprising that short-term loans are often associated with the need to urgently obtain additional funds. However, together with them, borrowers receive high interest rates, short repayment periods and other rather unfavorable conditions. And most importantly, the monthly payment will usually also be much higher, significantly affecting the monthly budget of the borrower, as a result of which loans are not always repaid on time.
When is a short-term loan profitable?
Meanwhile, the above characteristic of a short-term loan does not mean that a short-term loan will always be the most disadvantageous option when purchasing certain goods or services. In the end, the shorter the loan repayment period, the less interest you have to pay. Therefore, despite the fact that most lenders try to equalize this difference by issuing short-term loans at higher interest rates, the total amount of payments in such cases may be less than a loan of the same amount with a longer repayment period.
If you are sure that you can handle the high monthly payments and they will not affect other necessary expenses (for food, rent, utilities, etc.), a short-term loan may be a more suitable option. Just try to prudently plan the monthly budget, given the likelihood of unforeseen expenses, so as not to get into a situation where the monthly loan payment is too high, with all the ensuing consequences.
What is a long term loan?
In fact, this term can describe a very wide range of services, because most loans are issued for a period of more than one year, including a loan to purchase a car, consumer and mortgage loans. However, for clarity, in this article we will consider long-term consumer loans, since it is this type of loan that is best known to borrowers.
In contrast to the short-term loan, the longer-term option is characterized by more responsible and thoughtful borrowing. This type of loan usually has a lower interest rate and a lower monthly payment, as lenders more carefully evaluate the ability of customers to repay the loan. Moreover, due to the longer repayment period, lenders can offer customers a higher total loan amount for the purchase of goods and services.
When is a long-term loan profitable?
Despite the fact that, as indicated above, in some cases a short-term loan may be beneficial, most potential borrowers consider a long-term loan to be more beneficial. Firstly, they choose a long-term loan because of the opportunity to get a higher loan amount, and secondly, a long-term loan causes much less stress and much less limits monthly expenses. In addition, late payments on short-term loans usually mean fines that increase the already high amount of payments. Therefore, if you are not sure that you can repay a short-term loan with a high monthly fee, choose a longer repayment period with a monthly payment that you can afford.
Thus, a long-term loan is a kind of compromise between high total loan costs and a lower and more affordable monthly payment, which allows you to make a long-desired purchase. Those who choose this option generally feel much more comfortable in the repayment process and are much less likely to pay fines for late payments. For this reason, most people consider long-term loans the most profitable option.
Since there are plenty of various loan offers on the market – from both bank and non-bank lenders – it’s very easy to get confused and choose the wrong loan term. Therefore, it is important to understand that, for example, a shorter maturity or a reduced monthly payment does not always mean a more profitable option. To avoid this, first calculate how much you need to borrow and what maximum monthly payment you can afford, and then determine the optimal loan repayment period. This approach will allow you to find a loan offer that is most beneficial for you, keeping a balance between the available monthly payment and the profitable total amount of payments.