Short Term Loan or Long Term Loan: Which One Do You Need?
Securing a loan is something we’ve all though about at some point in time. However, a lot of people don’t really think things through when choosing the appropriate loan type. There are actually different kinds of loans out there and each one offers its own set of pros and cons.
In this article, we are going to discuss the difference between long term and short term loans to decide which one is appropriate in varying situations.
Short Term Loans
As the name suggests, short terms loans come with a reduced term. Payday loans are a good example of short term loans. Such a loan is secured when there are immediate expenses to be met. For example, if you need to fix your car and the repairs are significant, a short term loan can come in handy.
These loans basically function as advance cash payments from your bank. Short-term loans are easy to secure as well. Generally, it doesn’t take more than 48 hours to secure the loan. However, the maximum loan amount you can secure is a $2000 to $2500.
Another type of short term loan is a flexible loan. With a flexible loan you can secure up to $25000, but, the term is limited to a year. Also, short term loans come with a high interest rate.
So, a short-term loan or installment loan is the best option if you need cash flow in significant emergencies and if you’re a 100% sure that you can payback on time with interest.
Long Term Loans
The whole point of a long term is loan is that you can pay back over an extended period of time. That opens up doors to another key benefit – securing large amounts. A typical scenario, where you would require a long term loan is when you’re planning to buy a piece of property.
A house or a condo is going to cost you a lot of money and long term loans cover such high amounts. In this case, the long term loan is referred to as a mortgage loan. A mortgage loan will provide you with the benefit of a fixed interest rate, which does not change over the entire loan term. However, there are mortgage loans with adjustable rates as well. The interest rates change annually with such mortgage loans.
As for drawbacks, long term loans are quite difficult to secure. To begin with, the applicant must possess a good credit score. Not only does a good credit score help with securing the loan, it even offers the possibility of reduced interest rates.
Long term loans can either be secured or unsecured. Secured long term loans are provided against assets or collateral of some sort. Unsecured long term loans are not provided against assets or collateral. However, they make up for this by charging high interest rates.
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Which is the Ideal Option?
As it might already be clear to you by now, long term loans are a better option for significant purchases. However, short term loans address immediate needs. The loan amount in a short term loan is also limited. The same goes for the loan term as well.
Long term loans offer a longer payment term and also, higher amounts.
To put it simply, if you want to buy a house or seek higher education, opt for a long term loan. On the other hand, if you need to refurbish your home or fix your car, a short term loan is what you need.