4 Key Differentiating Factors Between Long Term and Short Term Loans
By admin | May 11, 2021 | Finance

When it comes to taking out a loan, it’s important that you know what you’re getting into. There are different kinds of loans, and knowing the differences between them can make it easier for you in the future, financially.

So what are these different loans and how can you benefit from them the most? Here’s what you should know about long-term and short-term loans, and how they differ from each other.

Payment Periods

The main difference between long-term and short-term loans is the length of the repayment period. Short-term loans are loans that must be paid off within six to eighteen months. Long-term loans allow for a much longer period of time for them to be completely paid off.

Eligibility Requirements

When it comes to long-term loans, it can be quite difficult to be eligible for them. This is because the lenders face a greater risk of nonpayment over a longer period of time. They have to be sure that they are lending money to people who they trust will repay them in full over time and on time.

Short-term loans have fewer eligibility requirements, such as having a decent credit score and having about $50,000 in annual revenue, for example, depending on the kind of lender.

The Loan Amount

Long-term loans tend to have higher loan amounts than short-term loans. This goes back to the loans having a longer repayment period, so the amounts tend to be higher by extension. Short-term loans can also be pretty high, but are never usually more than the maximum loan amount for a long-term loan. That is because lenders want their money back as quickly as possible, and that cannot be possible if a loan amount if more than the borrower can afford.

The Loan Cost

This is very different from the loan amount; the loan cost is the amount of interest assigned to you by your lender plus any loan fees that are also charged. Lenders wouldn’t be in the business of lending money if they also didn’t make a profit from these loans.

However, short-term loans tend to have higher interest rates than long-term loans. This is to weed out risky borrowers, and to ensure that short-term lenders are making money off their loans. There is also the convenience of the speed of the loan: a short-term with a high-interest rate could be more affordable to pay off in a short amount of time than a long-term loan with a lower interest rate. This is because over the life of the long-term loan, you’ll actually end up paying more than the fast sum of a short-term loan.

Knowing ahead of time what the different loans require could help you make the best decision for your financial situation. Defaulting on any loan or failure to pay them on time can have a detrimental effect on your eligibility for future loans.

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4 Key Differentiating Factors Between Long Term and Short Term Loans