When applying for a loan, it’s essential to take into account the term duration, which can be either short or long, depending on the purpose of the loan. The length of the loan term affects both the monthly payments and the interest rate. Therefore, it’s crucial to have a clear understanding of each loan term to determine which one meets your needs most effectively.
Short term loan
Short-term loans typically have a duration of two to three years, and among the common types is the payday loan, which provides immediate financial assistance until your next payday. Online lenders often offer this type of loan with minimal approval requirements, and the loan amount can be credited to your account on the same day.
Intriguing Cash Advances for Small Businesses
Many small and medium-sized business owners find cash advance and short-term loans appealing, particularly when they do not require long-term financing. These business loans provide flexibility and quick access to funds, enabling owners to maintain a steady flow of operations. Furthermore, short-term loans can be an ideal solution for overcoming financial setbacks and obtaining liquidity without having to secure a larger, long-term business loan.
Long term loan
A loan that lasts more than three years is classified as a long-term loan, and may involve a repayment schedule spanning several decades with monthly payments. Long-term loans can be secured or unsecured, with the latter not requiring collateral or assets, such as a home or car, to secure the loan. On the other hand, secured loans involve higher interest rates due to the increased risk for the lender.
Knowing the characteristics and distinctions between these loan types is critical to determining which one aligns with your current needs. Consider the following factors:
#1 Cost
Long-term loans typically carry a lower interest rate compared to short-term loans. Due to the extended loan term and higher loan amounts, processing fees and interest rates are naturally reduced. Conversely, short-term loans have higher interest rates since they are repaid in a shorter period. Therefore, if you require an immediate cash injection or need to build your business inventory for rush periods, short-term financing may be the preferable option.
#2 Purpose
Short-term loans are generally secured for immediate financial requirements, such as paying for purchases, meeting working capital needs, and covering unexpected expenses. These loans are relatively easy to acquire. On the other hand, long-term loans are usually secured for more ambitious objectives, such as:
- Constructing new infrastructure or property,
- Purchasing new land,
- Buying machinery,
- Expanding a business into a new geographic location.
As these loans necessitate more extensive evaluations, not everyone qualifies for them, and the approval process takes longer. As a result, long-term loans are more challenging to acquire than short-term loans.
#3 Eligibility
The eligibility requirements for short-term and long-term loans differ. Short-term loans are simpler to acquire since they have a speedy application process and need fewer documents. On the other hand, long-term loans are only approved after a thorough investigation of creditworthiness. To qualify for a long-term loan as a business owner, you must provide relevant information about your financial situation, including :
- your income and business financing
- personal credit scores,
- business profitability,
- predicted statements and financial objectives that demonstrate the future prospects of your business.
Do both loan types require a credit check?
While long-term loans often require a thorough credit check before approval, some short-term loans can be obtained quickly without any credit check. This means that if you are in a difficult situation and have no other options, you can still get a short-term loan with bad credit.
#4 Paperwork
Short-term loans can be applied for with minimal documentation, which typically involves:
- identity proof,
- address proof,
- income proof
- ITR returns.
Conversely, long-term loans require an extensive documentation process, and the business owner must submit many documents related to their property and business.
#5 Debt Trap Risk
The high interest rate and easy availability of finance for short-term loans pose a high risk of debt trap for borrowers who may struggle to repay the loan and incur a substantial amount of interest. In contrast, long-term loans offer a lower risk of debt trap as the extended repayment period provides more time to repay the loan.
#6 Processing time
Short-term loans can be processed quickly, whereas long-term loans require thorough verification and processing, which takes more time and effort. Due to the longer repayment period of long-term loans, banks/lenders carefully scrutinize the documents before approving the loan to avoid any issues.
#7 Convenience
Short-term loans can be pre-approved, while long-term loans may not have this option. Short-term loans often have a significant prepayment penalty due to their short repayment period, whereas this is not typically the case for long-term loans.
What is the better option between the two?
Ultimately, the decision to choose between short-term or long-term funding options depends on individual or business needs. It is crucial to consider the advantages and disadvantages of both types of loans and assess the current and future financial situation and risks to determine the best fit. It is also important to ensure that the loan supports your business or personal needs as much as possible.
