It goes further than the loan period.
Beyond the obvious repayment period difference, long term and short term loans also have other not-so-obvious differences. Here we will break down the main features of each loan, so you can get a glimpse of the difference between long term and short term loans and have a clearer idea about what kind of loan will fit you best.
Loan repayment period
As the name implies, long term loans offer a longer repayment period. It varies from a two-year loan for a working capital, up to a twenty-year house mortgage. On the other hand, the repayment period of short term loan is typically less than eighteen months.
Amount of loan
The longer a loan term is, the more loan amount is offered. With shorter repayment period, short term loans typically provide $2,500 to $250,000 loans, while long term loans may provide $5,000 to $500,000 loans. But remember, the amount of loan heavily depends on the borrower’s credit eligibility.
With higher amount of loan, long term loans are usually paid on a monthly basis. Short term loans is different. You can schedule weekly, bi-weekly or monthly repayment – depending on how much money you borrow.
Cost of loan
With zero collateral to keep borrowers from defaulting, short term loan lenders need to find another way to make sure they still make money, and they do it by giving higher interest rates than long term loans. It doesn’t necessarily mean that short term loans are costlier, though. Long term loans offer lower interest rates, yet since you hold on to it for a longer period, your total cost of loan will likely be higher.
Long term loan lenders, such as banks, have more requirements to make sure the borrowers can and will pay back their debts on time and in full. Other than background credit check, long term loan lenders will also check borrowers’ credit score, collateral eligibility, annual revenue, and even profitability.
Unlike long term loans, short term loan takes a shorter period of commitment from both the lenders and borrowers, so the requirements are less strict. The lenders will still check your credit score and annual revenue but the odds of getting your loan application approved are usually in your favor. Note that different lenders have different requirements to say yes to an application, so check with your lender to know the list of requirements you have to meet.
At the end of the day, opting for either long term or short term loans depend on your needs and financial condition. Taking both is also possible. Let’s say you’re planning to purchase a house and start renovating it right away. In this case, you can take a long term loan for the house mortgage and a short term loan to purchase the required materials.
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