In what situation do you need a short-term loan, and in what situation – a long-term one, what do you need to know before issuing loan obligations?
When you need a cash loan, then there may be several opportunities to solve this need – you can get both short-term and long-term loans from non-bank lenders. Such loans have different terms of repayment and also other important factors that must be taken into account during the assessment of what exactly you need. In this article you will find useful information and get advice from financial specialists on choosing the most suitable type of cash loan for you, as well as on the factors that can influence the choice of the loan form.
How is a short-term loan different from a long-term one?
The main difference between short-term and long-term loans is the loan repayment period: short-term loans are issued, respectively, for a short period (this can be only one month), in turn, the repayment period of a long-term loan can range from several months to several years. In addition, the amount of short-term loans is relatively small – in most cases, it is no more than $1,000, and the interest rate on short-term loans is higher than that of long-term loans.
Long-term loans are offered not only by banks but also by many non-bank credit institutions. Such loans are issued for longer periods, often the loan amount reaches $50,000. A long-term loan is often defined as a loan with a repayment period of more than 12 months. It is also important that due to the large loan amounts and the longer repayment period (which means longer loan commitments), lenders are more careful in assessing the loan applicant’s compliance with the conditions for the successful repayment of the amount issued. Sometimes a long-term loan is issued against collateral.
Types of long-term loans
Non-bank credit institutions often offer special types of long-term loans to finance the most popular types of needs and requirements of customers. The formats of long-term loans also differ. Below you will find a short description of them:
- A consumer loan is the most popular type of long-term loan, which is widely used for various purposes, for example, for home renovations or the purchase of household appliances;
- A car loan is a long-term loan for the purchase of a used car, which non-bank credit institutions most often offer as a specific type of loan;
- Car leasing is another type of loan for the purpose of purchasing a car, only, unlike a car loan, the car lease recipient does not immediately become the owner of the car – for the period until the loan is fully repaid, the car remains in the possession of the company that provided the leasing. The machine goes into the possession of the recipient of the loan only after the full loan repayment.
- A credit line is an elastic type of loan, the repayment period of which can be up to several years, but it can be repaid much earlier. The most significant difference between a credit line and a consumer loan is that interest must be paid only for the funds used, and not for the entire provided credit limit.
- Re-crediting or loan consolidation is a form of long-term loan in which the loan recipient combines several loan commitments into one recurring payment.
- A mortgage loan is a long-term type of loan issued by one of the banks for the purchase of housing, which is secured by real estate.
- A student loan is a long-term loan issued by a bank to pay off tuition fees (student loan) or student’s daily expenses.
Which type of loan is more suitable in a particular situation?
In what situation do you need a cash loan? How do you choose the most suitable type of lending? Before making a decision, weigh all the factors that determine the differences between loans and your needs! What factors should be considered?
- Purpose of the loan. A loan is always issued for a specific purpose – this will help you understand which type of lending is most appropriate for a specific situation. For some long-term loans, the purpose of their use becomes clear from their very name (car loan, mortgage loan, student loan), but a consumer loan may have different purposes. A short-term loan is a type of loan that is usually chosen in an urgent situation, for example, when you need to pay for medical services, repair a car or household appliances, urgently cover other financial obligations. In turn, a long-term loan is usually used to implement larger plans, such as buying a car, home furnishings, or paying for home improvement work.
- The required amount of money. The choice of the lending form is greatly influenced by the size of the required amount – if a larger amount of money is needed, a long-term loan is chosen, but if the amount is not large and it is needed as quickly as possible, then, most likely, a short-term loan will be the most suitable solution.
- Loan cost. It is important to assess not only the amount of the loan but also its total cost since short-term loans, compared to long-term ones, usually have higher interest rates. For example, if the purpose of the loan allows you to choose a long-term loan, and you qualify as a recipient of such a loan, then in most cases this form of lending will be the best choice precisely because the total cost of the loan will be lower.
- Amount of monthly payment. The repayment period of a long-term loan, as its name implies, can be very long. In turn, when applying for a short-term loan, in most cases, you will have to start paying the loan already in the next month after receiving the money. Everyone, of course, must assess his own capabilities.
- Borrower eligibility requirements. In the case of a long-term loan (and depending on the size of the amount), the lending institution may ask the potential client for additional security for the loan, but in any case, the loan recipient must meet the requirements established by the lending institution. The lender will be interested in the credit history of the loan recipient, his solvency, as well as, possibly, other factors that are important for the lender.
In turn, short-term loans are usually issued without collateral or surety. In this case, it is especially important to assess your own ability to repay the loan on time.