Difference between Short Term and Long Term Loans

makeitcheaper6The thought of a loan seems to have crossed everyone’s mind at some point in life. Generally it’s not carefully thought out though. A loan is a specified amount of money someone borrows with the intention of paying it back. Generally it’s over a said period of time and is paid back with interest. There are different types of loans falling into two major categories: short term and long term. A person may find themselves needing a loan for many different purposes.

Short Term Loans

Short term loans are generally up to about three years. A popular short term loan is a payday loan. Someone may take a payday loan out in the event of an emergency such as car repairs, taking a vacation, or other unexpected bills. Payday loans are like a cash advance in which the payment comes from your bank account on your next pay date. These are very popular because of the few requirements needed to be approved for the loan. Unlike a long term loan, you can get cash within 48 hours from companies like Online Payday Loans.net and there are no credit checks. These loans are generally up to $2000.

Another popular short term loan is a flexible loan. This is generally a credit based loan, but up to $25,000. The term is generally 12 months. Short term loans are at a higher interest rate than a long term loan, capitalizing on the length of your loan. A lender will use the situation that you do not have credit in order to offer the higher interest rate.

Long Term Loans

Long term loans can be taken over an extended amount of time. Most common long term loans are mortgages, student loans, wedding loans, start-up business loans, and home improvement loans. A long term loan is credit based. The better your credit score the better your interest rates will be. A long term loan can be in the form of a secure or an unsecured loan. A secure loan requires a form of collateral or asset, such as a title to your car or your home. An unsecured loan does not require any assets and has a higher interest rate as the lender has more at stake. You can think of this as a line of credit with your bank or a credit card.

Taking a long term loan is generally through a bank or credit union, unlike a short term loan. The amount of the loan will be based on your credit history and current income. With long term loans, you have greater flexibility with payment options. For instance, mortgage loans offer a fixed interest mortgage loan, in which the rate is the same over the term of the loan and the payments are split equally. An adjustable rate mortgage loan’s rate can adjust every year. There is also an interest only loan, of which a person can pay only the interest of the loan for a set amount of years, and then start paying on the principal. Unlike short term loans, long term loans can help establish credit.

When making the decision to take a loan, it’s important to think about a few things. Think if you really need the loan and weigh other options. Shop around for the best interest rates. Consider the consequences. Make sure you are able to afford paying the loan back. For instance, a payday loan will take so much of your next paycheck. Make sure it doesn’t dig you further into debt on other bills.