Sometimes, we all need a little help to get to where we want to be. Everyone’s circumstances are different, and we may not have vast reserves of capital ready and waiting to be invested in that bold new business venture, that shiny new car or that holiday of a lifetime. In these situations, it’s typical for businesses and individuals alike to look towards taking out a loan to help them achieve their goals.
Of course, what kind of loan you decide to apply for will depend on several factors such as how much you need, how much you can afford to repay, and whether you apply for a secured or unsecured loan. But the most pressing question should always be how long you’re willing to be paying it back and that’s where short-term and long-term loans come in.
Each option has its own distinct benefits and drawbacks, so it’s important to consider these before making a decision for yourself. We’ll be exploring everything from basic definitions to various examples and the key differences between short and long-term loans to help you understand the best option for you.
What is a Short-Term Loan?
Short-term loans are typically taken out for smaller investments and should be paid back within a year. By design, these loans provide immediate access to funds, which means they’re often used when people are in urgent need of funds. They are offered by banks; credit unions and online lenders and the application process is generally quick and easy with minimal fuss and documentation.
What are Short-Term Loans Used for?
Given the relative ease of application and immediate access to funds, short-term loans are typically used to cover unexpected expenses or emergencies. This could be anything from a car repair to an emergency vet’s bill for your beloved family pet.
The reason they are so commonly sought after in such trying times is their speed. These loans can be approved and paid to the applicant in a matter of minutes, which means they can prove a necessary lifeline in financially stressful times.
Short-term loans can also help small business owners in desperate need of immediate inventory purchases and entrepreneurs have also been known to use them to bridge cash flow gaps.
What is a Long-Term Loan?
As you would expect, long-term loans are repaid over an extended period ranging from several years to even decades, in some cases. These loans are commonly associated with larger amounts and higher borrowing costs and while, like short-term loans. Long-term loans are offered by banks, online lenders, mortgage lenders, and credit unions. They can, be offered by government entities, but usually for very specific purposes and may be means tested.
What are Long-Term Loans Used for?
Whereas short-term loans are used for more impulsive or immediate purposes, long-term loans are generally used for major investments, with the most obvious example being a mortgage loan that can be paid off over 15 to 30 years.
Long-term loans can also be used to finance higher education, with the borrower repaying the loan over several years after completing their studies, as is the case with a typical student loan.
Businesses might also rely on long-term loans to fund more ambitious expansions, like investing in additional retail or office space, for example. This could give them financial stability upon which to build and grow over years and decades.
Short-Term vs Long-Term Loans
There are several important distinctions to make between short and long-term loans, besides the obvious difference in repayment periods. Here we’ll go through the key differences.
Interest rates
Due to their shorter repayment period, short-term loans are deemed a more significant risk for the lender and, as such, interest rates will often be substantially higher. Long-term loans, meanwhile, are seen as a lower risk given that they’re spread out over a longer period. This mitigates the risks somewhat for the lender and the lower risk is passed onto the borrower at a lower rate.
Cost of borrowing
Short-term loans might have higher interest rates, but the overall cost might be lower due to the shorter repayment period. Long-term loans, although potentially more affordable monthly, can accumulate more interest over time, leading to a higher overall cost. As ever, this may vary depending on your lender’s specific terms.
Loan purpose
The actual purpose of the loan will play a definitive role in your choice of loan. Go short-term, for example, if your needs are urgent such as major car repairs that you don’t have the immediate funds for, or if you’re a small business that needs to bridge a temporary gap in cash flow. Long-term loans, meanwhile, are better suited for larger investments that you have an extended period of time to pay off. A second charge mortgage or a new car, for example, or financing a late jaunt into higher education.
Make a considered assessment
When deciding between short-term and long-term loans, don’t be afraid to put your financial situation under the microscope and critically evaluate your ability to make those monthly payments. Look at your overall financial situation holistically too and ask yourself if the loan could potentially benefit or harm your financial wellbeing.
It’s a delicate balance to strike and you’ll want to ask as many questions as possible before applying, whether you go short or long-term. So, compare interest rates and borrowing costs, explore as many different lenders and loan options as possible, and if in doubt, seek professional advice.
Applying for a long-term loan with Pepper Money
Applying for a short or long-term loan can be useful and convenient, but it’s always important to consider your financial situation and the risks and benefits involved.
At Pepper Money, we take a more human approach to lending, offering bespoke, expert advice every step of the way. We can help you find the loan that fits perfectly within your financial needs and goals. We even provide a free homeowner loan calculator for those looking to gain some perspective on what a loan might look like for them.
So, if you’re a homeowner looking for a long-term loan, why not speak to one of our broker partners? Find a broker and allow them to expertly guide you through the process.