The differences Between Short Term and Long Term Loans

Loans are simply a part of life. Most people accept this as something which is inevitable and they try to make the best of the situation. Our society is constructed in the way which puts money first. This is something which we have to deal with, whether we like it not. Financial stability is something which we all want. We work hard to accomplish this, even if it is not always easy and possible.

Different events and occurrences can change the course of life and take us into unknown directions and cause us to spend more, or those events and situations simply require more money. However, those situations can sometimes surprise us and come in a moment which is not so good for us. We can get in a scenario where we need larger quantities of cash which we simply do not have at that particular moment. Those situations are solved by borrowing the required amount from family, friends, banks, credit unions or some other form of financial institution.

When we borrow money from a bank or a credit union or from any other source, we promise to return it in the agreed period, usually with interests included. Those agreed periods can be different, which depends on the bank and on the client’s desires and intentions. Most banks and financial experts differentiate loans according to the period for which they are taken. They divide loans into two categories: short term and long term loans.

Short term loans

Short term loans are loans taken for a period of up to 1 year, maximum 3 years.  They are usually taken for relatively smaller amounts of money. Of course, every bank can have its own interpretation of these criteria.  These features and attributes are similar in most banks around the world.

Short term loans generally have higher interest rates, but banks do not take strong form of guarantee, or a collateral, when it comes to these loans. However, these loans also come with high monthly payments.  Simply because the total amount is divided by lower number of months. Also, short term loans can be payed out in one installment, and this type is known as payday loans. Payday loans can be found through various websites, either directly through a payday lenders website, or on various comparison sites like Quiddi Compare in the UK.

 

Long term loans

When it comes to long term loans, banks generally have to have some form of guarantee for this type of borrowing, since long term loans are taken for very large sums of money. People usually use long term loans for buying a house, a car, for financing a student’s tuition, home improvements, business investments or some other type of expenses. Long term loans are taken for periods longer than 3 years, and maturity date for these loans can go up to 25 or even 30 years.

Since the period is so long and more months are incorporated into the time frame, monthly installments are lower, which attracts a lot of clients to this type of loans. Also, interest rates are lower with long term loans as well, since banks already have a collateral and they are sure that they will have a return from the loan in any case.