This article will discuss the implications of short-term loans in comparison to their long-term counterpart to determine which option would be more affordable and more suitable to your borrowing needs.
Saving money can be difficult; with the cost of living on a constant rise and unexpected bills pouring their way in, there has to be other ways to get the money you need without having to save.
Which loan term is the best option?
Sometimes small unexpected expenses arise like broken appliances, vehicle repairs or even plane tickets and a loan might be the only way forward. Loans are an excellent option to get large sums of money for those renovations you have been putting off or purchasing that additional vehicle for the family.
The loan term that you choose for the loan will depend on how much you need as well as on affordability. For those that have a tigher budget you will need to contend with a longer loan term that will allow you to have smaller repayments.
The long-term implications of short-term loans
Short-term loans are a popular choice among those who need to either borrow small amounts of money or need money fast. Because short-term loans have lower borrowing amounts, money can often be cleared a lot faster than with long-term loans.
Traditionally short-term loans are also unsecured which means that you do not require an asset as collateral when applying. Not requiring an asset adds to the speed in which the loan can be cleared since the lender does not have to get the asset evaluated. Overall, the turnaround time on short-term loans is very short making it an obvious favourite for fellow Aussies.
But no security comes at a price and that price is higher interest rates, lower borrowing amounts, and shorter loan terms. While a short-term loan is excellent for avoiding a long-term debt trap, they do carry higher interest rates than long-term loans which rake in a hefty amount of interest monthly.
If the borrower can make additional payments or repay the loan early, then the loan will generate significantly less interest. If you choose a short-term loan it is best to ensure that you can, firstly, afford the repayments and, preferably, if you can make additional payments to repay the loan faster than intended.
How does a short-term loan compare to a long-term loan?
Aside from the definite difference in the loan term, there are a few other reasons why a short-term loan could be better suited than a long-term loan.
If they are only able to make the minimum payment on a short-term loan, it is advisable to take a long-term loan and make the same payment on that loan as quoted on the short-term.
This way, the borrower will be repaying some of the interest accumulated and can even consider making an early settlement should they find themselves with additional money at hand.
Total interest accrued
Even though the interest rate on a short-term loan is higher than that of a long-term loan, it is often better to apply for a short-term loan – especially if it is to borrow a small amount of money. Long-term loans might have lower interest rates, but they have longer loan terms.
This means that the loan has more time to accumulate interest and monthly fees than a short-term loan resulting in the borrower paying a large amount of charges and interest when compared to a short-term loan. The only time that the long-term loan would be cheaper in this situation is if additional payments are made or the borrower is aiming for early settlement.
Security is not required for most short-term loans
Generally, short-term loans are unsecured while long-term loans are secured. This means that long-term loans require assets as collateral while a short-term loan will not. While the added security does allow for lower interest rates, longer loan terms, and higher borrowing amounts, it does place your assets at risk if you are unable to repay the loan. If you do not have any collateral, then you do not run the risk of losing it.
Bad credit situations
Often bad credit stands in the way of many borrowers, preventing them from accessing the loans that they need. Luckily there are establishments which cater specifically for those with less-than-perfect credit records in the form of bad credit loans.
Both short- and long-term loans can be beneficial to the borrower in improving their credit. However, security is often required to reduce the risk that the lender is taking. However, there are also secured short-term loans available but these are harder to come by. The borrower should consider a short-term loan as this will not lead to a long-term debt obligation.
In this way, they will be able to repay the loan faster thereby reducing the chance of running into a poor financial situation in the long-term and improve their credit record by the end of the loan. The borrower can now use their improved credit standing to access better loan options. In addition to making your loan repayments on time, there are many things that you can do to improve your credit rating.
Summary of short-term loan features to note
- Offers smaller loan amounts.
- Interest rates are higher than that of long term loans.
- Loan applications are quick and can be done online.
- Money can be paid out within minutes.
- Loans are typically unsecured.
- Loans can be accessed by those with poor credit.
- Can be obtained from banks, p2p lenders, and alternative or online lenders.
A loan must be tailored to your individual needs
Overall, when deciding between a long-term and short-term loan, the borrower will need to calculate what the best and most affordable option for their situation is. They can do this by assessing their past and current financial situation and assess the most appropriate way to achieve their future financial goals.
Both short- and long-term loans carry their perks and drawbacks depending on the situation of the borrower. This is why the borrower needs to assess their circumstances to make the most informed choice.