Short-term loans generally have terms shorter than 12 months, although many are as short as one to two months. Meanwhile, long-term loans last longer than 12 months. Both let you borrow money if you don’t have enough cash to make a purchase, but several differences make each better for certain situations than others. This article will dive into some key differences between short-term and long-term loans so you can decide which is right for your borrowing needs.
1. Borrowing amounts
Short-term loans tend to offer smaller amounts since you won’t have as long to pay them back. For instance, payday loans typically offer a few hundred dollars, and borrowers can pay back what they owe in two to four weeks. It would be quite difficult to pay back a large loan within a month, if not a few months. Long-term loans, on the other hand, usually offer larger amounts. You can spread out the balance over several years, making a big loan easier to pay off.
2. Interest rates
Short-term loans often charge higher interest rates. Plus, they may charge various fees, such as financing charges, alongside the interest payments. These fees may be due upfront or when you pay off the loan.
Long-term loan interest rates tend to be lower, as an annual percentage rate, than short-term interest rates. This makes it easier to afford the long-term repayment process. That said, within long-term loans, longer terms may bring higher rates. These loans may also have fees, but when spread over the longer term of the loan and compared to the typically larger amount of these loans they tend to cost proportionally less than short-term loans.
Many borrowers get short-term loans to receive quick cash for bills and living expenses. For instance, someone might get a cash advance if their rent is due before their next paycheck arrives and they don’t have the funds for rent. Another example is a title loan, or secured loan that uses your car as collateral. A car owner might get a title loan to finance a medical bill or home repair.
Long-term loans are more useful for large, planned purchases because they offer fixed predictable payments and help you afford these expenses without having the cash upfront. For example, a mortgage loan is a long-term loan used to buy a home. Another example could be a large, long-term personal loan. This could be used to finance all sorts of large personal purchases, like furniture or home renovations.
The bottom line
Short-term and long-term loans can both help in situations when you need to stretch beyond your available funds temporarily. But they have key differences suiting them to particular uses and borrowers.
Short-term loans tend to offer smaller amounts at higher rates. This can make them suitable for bills and living expenses when you’re short on cash, like rent and utilities. Meanwhile, long-term loans provide you with larger borrowing amounts and lower rates, helping you spread payments out for larger purchases like buying a house. Regardless of the loan you choose, shop with multiple lenders to find great rates and terms on the funds you need.