Short-Term vs. Long-Term Loans: Which Is Right for You?

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A loan provides the cash you need to cover things like an unexpected expense, major purchase, debt consolidation or business launch. When you take out a loan, one of the first choices you’ll face is how long you’ll need to repay it. Short-term loans typically have repayment periods under 12 months, while long-term loans can stretch from several years to decades.

Whether you should choose a short-term or long-term loan depends on your financial situation and the reason for your loan.

Short-Term vs. Long-Term Loans: Differences at a Glance

Here’s an at-a-glance look at the differences between short-term vs. long-term loans:

What Are Short-Term Loans?

A short-term loan usually has a repayment period of 12 months or less, although you’ll occasionally see one with a term as long as 18 months.

Here are some key points to know:

• Flexible use: You can use one for personal or business expenses.
• Smaller amounts: These loans are typically for lower dollar amounts due to the quick repayment schedule.
• Easier approval: Generally easier to qualify for than long-term loans.
• Fast funding: Lenders often fund short-term loans quickly.
• Best for urgent needs: They are a good choice for one-time cash emergencies such as auto or home repairs or an unexpected business opportunity.
• Can be costly: They can be expensive, especially in the case of payday loans for personal use and merchant cash advances for businesses.

Short-Term Loan Pros

• Can be easier to qualify for
• Usually doesn’t require collateral
• Fast approval and funding
• Debt paid off quickly
• Possibly less total interest compared to long-term loans

Short-Term Loan Cons

• Higher interest rates
• Larger monthly payments
• Stricter qualification requirements
• Less flexibility

What Are Long-Term Loans?

Long-term loans have repayment periods of at least 12 months but are usually much longer — anywhere from two or three years to 30 years or more. As a result, long-term loans are the better choice for major expenses such as a car or home purchase, tuition, wedding or startup costs for a new business.

Keep these points in mind:

• Stricter qualifications: Long-term loans can be more difficult to qualify for because the lender has to trust that you’ll keep up with your payments over an extensive period.
• Often require collateral: Long-term loans are often secured loans, meaning they require collateral. This could be the car you’re financing with an auto loan, the home you have a mortgage loan for or the business equipment you’re financing with a business loan.
• Lower monthly payments: Although you might pay more interest over the life of a long-term loan compared to a short-term one, the rate is likely to be lower, which helps keep the payments manageable.
• Flexible terms: Since long-term loans have more repayment periods to choose from, you can customize your loan to balance total interest with affordability.

Long-Term Loan Pros

• High loan amounts possible
• Lower interest rate
• Lower monthly payments
• More terms to choose from

Long-Term Loan Cons

• Potentially higher total interest payments
• Longer commitment
• May require collateral

Short-Term vs. Long-Term Loans: Key Differences

Several characteristics differentiate short-term loans from long-term loans.

Repayment Period

• Short-term loans get paid off in a year or less.
• Long-term loans are usually paid over three to 30 years, depending on the loan type.

Interest Rate

• Many short-term loans are marketed to people facing financial hardship, which makes them riskier borrowers. Rates can be high as a result.
• Long-term loans usually have lower rates, but the longer repayment period could result in higher overall interest costs.

Loan Amount

• Short-term loans have to be repaid quickly, which limits how much you can borrow.
• Long-term loans usually let you borrow higher amounts.

Approval Process

• Short-term loans often have quick approval, and you might qualify for some types even if your credit is damaged.
• Long-term loans often take longer to be approved because the lender investigates your finances more thoroughly.

How To Choose Between Short-Term vs. Long-Term Loans

The loan term you choose will have lasting implications for your finances, so weigh your options carefully. Here are four questions to consider.

What Are Your Financial Goals?

Find a good match between the loan’s purpose and the term. Whereas 12 months might be all you need to pay off a credit card consolidation loan, a longer-term loan gives you more flexibility for major expenses like home remodeling projects.

What Is Your Repayment Ability?

While it’s always a good idea to pay off debt sooner rather than later, you’ll also want to avoid straining your budget by selecting a term that’s too short for the amount you borrowed.

Do You Know Your Total Costs?

Use an online calculator to compare total interest costs for different loan terms.

Can You Afford the Financial Risk?

It’s difficult to predict future income and expenses. Leaving yourself some leeway will make it easier to ride out unexpected setbacks such as job loss, illness or other major expenses.

Loan Term Comparison: Payment and Interest Breakdown

To see how loan terms affect the big picture, consider this example:

• You want to upgrade your bathroom and decide to use an unsecured personal loan to finance the project. You expect to pay $10,000 for the job and will finance that entire amount. Your interest rate is 10%.

Here’s how your loan term would affect your payments and interest.

Claire Hawley contributed to the reporting for this article.

This article has been updated with additional reporting since its original publication.

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