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When deciding on a loan, you’re met with different repayment terms, interest rates, and credit requirements. Choosing between a short-term loan and a long-term loan can be difficult, considering the different implications that come with them. Do you want to pay it off quicker, or do you prefer a lower monthly payment? Doing a thorough loan comparison between the two can help determine which loan best fits your current situation.
A short-term loan is paid off for a period of six months to a year, interest included. These are generally used to temporarily pay for a small expense, like an unexpected medical bill or a car repair. Short-term loans include different types of personal loans, cash advances, and lines of credit, which give you quick access to money when needed.
Long-term Loans
On the other hand, long-term loans are used for big expenses that take a year to 25 years to pay off, since the monthly payments are spread out over a longer period. Some examples would include mortgages, student loans, secured loans, and even personal loans.
Factors to consider
1. Application requirements
First, consider the effort and requirements that go into applying for different types of loans. Some take more time and have higher credit requirements, while others are easier to attain. A short-term loan is generally more flexible with credit score requirements, while a long-term loan requires a higher credit score from borrowers.
Some long-term loans may also require collateral, like a house or car, that will give lenders a form of security in case the loan isn’t paid off.
2. Total cost of interest
The time you take to pay off a loan affects how much it’s going to cost overall. A short-term loan typically has higher interest rates, but it has less time to accumulate. By the end, you will still pay less in total interest. However, this would mean paying a higher cost monthly.
With a longer-term loan, interest rates are lower, but it will accumulate over a longer period of time and cost you more in total interest. The advantage of this would be a lower monthly payment spread out over many years. Choosing this option is one of the loan repayment strategies used by aspiring homeowners who allot less for monthly mortgage payments.
3. Potential for home and asset purchases
When it comes to bigger purchases like a house, the length of the loan’s repayment period impacts how affordable it can be. For example, with a 15-year mortgage, the monthly payment will be significantly higher than a 30-year or 40-year mortgage.
With a longer-term loan, homeownership becomes more possible for people who aren’t able to make an upfront payment or large monthly payments. However, the shorter-term loan can be beneficial for those able to put in more monthly, as they build home equity faster and pay off their debts sooner.
4. Future risk / Payment terms and commitment
When choosing a loan, you want to think of your financial situation in the long term, since this impacts how capable you will be of paying it off. With a short-term loan, there’s a lower risk of your financial situation changing drastically within a year.
On the other hand, a long-term loan could span a course of 10 years. Within that time, your financial situation could change even more. If you lose your job or debts start to pile up, you will struggle to make the monthly payments on your long-term loan.
Choosing the Right Loan for You
Choosing between a long-term and short-term loan ultimately depends on your financial situation and the expenses you will incur. With all the different loan options, choosing the right type for you is an important decision.
Short-term loans are a good option if
- You have a smaller expense
- You’re willing to pay more monthly
- You want to spend less overall
- You need more flexible requirements
Long-term loans are a good option if
- You have a much larger expense
- You want to spread out your payments
- You’re ready to commit to debt for longer
- You have a higher credit score
Fast pre-approvals, tailored loans, and trusted advice—that’s what you can expect with Nclusive Financial. If buying your first home, investing in property, or looking for the right loan, we’re here to help you make it happen. Let’s turn your next move into a reality.
Key Takeaways
- Choosing between a short-term and a long-term loan can greatly impact your ability to pay off your debt.
- Short-term loans are good for small, temporary expenses, and for people who are willing to pay more monthly and less in interest.
- Long-term loans are useful for big purchases and assets. They can be paid off at a lower monthly cost, but for a longer period and a higher overall interest.
References
- Kwan, P. (2024, March 24). Short-term vs Long-term Loans: Navigating Your Best Option. Driva. https://www.driva.com.au/blog/short-term-vs-long-term-loans/#:~:text=Short%2Dterm%20loans%20have%20higher,over%20the%20extended%20repayment%20period.
- Long-term loans. (n.d.). Experian. https://www.experian.co.uk/consumer/loans/types/long-term-loans.html.
- Nageswaran, A. (2025, February 9). Long-Term Loan: Advantages and Disadvantages. The Business Blaze. https://thebusinessblaze.com/long-term-loan-advantages-and-disadvantages/?utm_source.
- Short Term Loan. (n.d.). Corporate Financial Institute. https://corporatefinanceinstitute.com/resources/accounting/short-term-loan/#:~:text=Short%20term%20loans%20are%20called,a%20year%20to%2025%20years.
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