Long-Term Vs. Short-Term Loans: Which Is Better for You

The type of loan you go with can have a significant impact on your financial health. For example, if you take out a short-term personal loan, you will have a smaller balance to repay but with higher interest rates.

Similarly, if you apply for a long-term loan, you might get low interest rates but the overall amount will be bigger and could take longer to repay. Considering that, you should know that there are pros and cons to both types of loans.

Whether you go for short or long-term loans, it is really important to understand your needs to make a viable decision. If you are in a medical emergency or have an urgent need, a short-term loan works.

But for a bigger purchase like setting up a downpayment on a favourable house or car deal, a long-term loan would work best. But there’s more to understand about both these types, so keep reading.

What are Short-Term Loans?

The first thing you should know about short-term loans is that these only last for a smaller duration. You can expect to repay them in a few months to a year. The most common reason why people go for these is because they need immediate cash for urgent needs.

It could be unexpected medical emergencies or repairs. Some people also go for short-period loans when they face cashflow gaps in their business. These loans are also ideal for meeting day-to-day household expenses if you’re already low on savings.

Do They Have Any Benefits?

• Fast Access to Cash
  They are also called fast loans because they give you quick access to funds, sometimes within days. This makes them suitable for immediate financial needs.

• Simple Application Process
  The process for these loans is also very simple. You might have to show ID, proof of residence, and so on before qualifying for a short-term loan. They often require minimal documentation.

• Fixed Rates
  Depending on the short-term loan period you choose, you can benefit from fixed interest rates. They will make repayment easier to calculate and manage based on your budget.

Do They Have Any Drawbacks?

• High Interest Rates
  Most short-term loan lenders propose higher interest rates. This is mainly due to the high risk associated with these loans and the minimal documentation requirement.

• Financial Burden
  It can be difficult to facilitate high interest rates on a tight budget when you apply for a short-term loan. This can make it a challenging financial burden for some borrowers.

• Not Suitable for Larger Expenses
  Although a short loan will give you quick access to immediate funds, it is not suitable for larger expenses. Furthermore, you can’t consider a short-term loan if there’s a chance of unexpected costs in your plans.

What are Long-Term Loans?

When it comes to long-term loans, these have flexible repayment periods. However, they typically last from one year to several years. That’s what makes them most suitable for larger expenses and they also have a different set of pros and cons compared to short ones.

They are suitable for a major purchase like a home or car. You could be in need of a large sum to put in the downpayment for such a purchase. Conversely, they also work when you need financial assistance during debt consolidation or significant life events like marriage.

Do They Have Any Benefits?

• Low Monthly Payments
  This is one of the main benefits of applying for a long-term loan. The repayment is spread across several years which leads to lower monthly payments.

• More Manageable
  A long-term bad credit loan can be more manageable with your financial strategies. Since it offers lower payments, you can easily adjust your larger expenses or take time to plan for the future.

• Lower Interest Rates
  The long-term loans come with low interest rates. This is partly because the repayment is spread over a longer period and it requires a slightly complex approval process.

Do They Have Any Drawbacks?

• Higher Total Interest Paid
  This is something that even a financial novice will let you know. Although you will be paying low-interest payments, they’ll accumulate over a longer period and will be significantly higher than short-term loans.

• Longer Commitment
  When you apply for a long-term loan, you will be committing to a lengthy financial obligation. While it is easy to manage, it will prevent you from taking out additional debt in the future.

• Long-Term Credit Impact
  We know that a long-term unsecured loan is quite easy to manage when compared to short-term ones. However, it can impact your debt-to-income ratio for a long period which can affect your credit score further.

How Should I Choose the Right Option?

The best way to make sure that you choose the right option is the consider a few factors. You should begin by assessing your financial situation and then your repayment ability. Next, you should consider why you actually need a loan and if there are alternatives.

What is My Financial Situation?

You will have to first assess your income and expenses to get a rough idea of your monthly cash flow. We advise including existing debts in the assessment to help you find a loan that fits best according to your financial capacity.

Can I Repay Loans?

This is where you will calculate your income and expenses to see if you have enough room to squeeze in a loan repayment plan. Since the shorter loans have higher interest rates, they could be difficult to manage on a tight budget. Meanwhile, longer loans will require a commitment for an extended period.

Why Do I Need a Loan?

Finally, consider why you need a loan. Is it for a car deal that you are sure will come around later? Then, you can wait for the right opportunity when you might not need a loan at all. Similarly, a short-term loan could help you pay for an emergency while a long-term loan could help with say, debt consolidation.

Conclusion

Now you have a better understanding to differentiate between a short-term bad credit loan and a long-term personal loan. Once you have a better idea of your financial health and why you actually need the loan, it becomes easier to make the decision.

You can go for a short-term loan if you are in need of an urgent cash source. However, if you want to repay on flexible terms with lower interest rates, long-term loans are the way to go.

Are you still uncertain which type of loan will work best for you? You can discuss your needs with an expert at Magical Credit. Contact us and explore various loan solutions today!