The term loan is a borrowed amount for a fixed period that is paid back with interest. Loans may vary from 30 days to 30 years, the period to repay the loan amount is agreed between the lender and borrower.
Based on the repayment tenor of loans, we can categorize them into short-term and long-term loans. Short-term and long-term loans may refer to the tenure of repayments. Short-term loans are paid back within a few months or a year. Long-term loan payments can remain for several years to many years (10-15 years). The rate of interest on loans may be fixed or floating in nature.
Differences Between Short and Long Term Loans
Before opting for a loan you need to understand the fundamental difference between short-term and long-term loans. Some prime difference between them is listed below:
The main distinction between long-term and short-term loans is the amount loaned to a borrower. The higher the loan amount, the more time it will take to repay it, in most cases. Short-term loans make repayments effortless and without going into debt.
Short-term loans are generally for 1 to 5 years, whereas for long-term loans, the period may vary between 10 to 20 years. The lengthy repayment time allows a business to spread its debt over a more prolonged period.
Usually, a high-interest rate is charged on short-term loans to recompense for a short repayment period. As short-term loans are offered without any collateral or asset, makes it riskier for lenders in case of default repayment.
Credit Score Requirement
In the case of short-term loans, a user with a lower credit score can avail of loans. Application with a lower credit score gets rejected while availing long-term loans.
Loan approval time
The main reason borrowers apply for a short-term loan is that they’re disbursed swiftly with minimum documentation. Long-term loans usually take a longer time to be disbursed. Short-term borrowings are approved within 24 hours which is almost impossible in the case of long-term loans.
In long-term loans, documentation required is heavy as a high amount is lent, they are approved only when all the eligibility criteria are met and also the creditworthiness of the borrowers is thoroughly assessed. Short-term loans are offered with minimal documentation.
Apart from short-term and long-term loans
Apart from short-term and long-term loans, Some loans can either be short-term or long-term loans or about in-between. A car loan is an example of this category. This can be either be a big amount or smaller amounts depending on the arrangement.
Eventually, selecting between short-term vs. long-term loans depends on the specific needs of your business. Both short and long-term loans have different advantages and are supposed to serve several wants. It’s foremost for borrowers to understand the need to be fulfilled. In a circumstance of urgent financial need and you are sure to repay a loan within a short period, short-term loans would be an ideal match. Certainly, where you need a longer period to pay your loan in small payments then Long term loans would be the most suitable choice.