Long-term vs Short-term Loan: What’s Better for Your Finances?
You can get loans to fulfil specific purposes and can repay them during a certain tenure based on your financial capabilities and the lender’s policies. Based on the tenure, loans typically come in two main categories, i.e., long-term and short-term financing.
Each of these offers unique benefits and caters to differing requirements. To keep your finances in order during repayment and make an informed decision, it is crucial to understand the long-term vs short-term loan comparison.
What is a Short-term Loan?
This financing option caters to your immediate financial needs. A short-term loan typically has a repayment period ranging up to 3 years. It also comes with a quick processing and disbursal period.
Moreover, it is unsecured in nature, which means you don’t have to part with collateral to get this loan. It may come with a higher interest rate as there is security for the lender.
You can use these loans to cover various types of sudden expenses, such as:
What is a Long-term Loan?
It refers to a type of instalment loan that helps you cover larger, unplanned or planned expenses. A long-term loan usually has an extended repayment period, which may range between 3 and 30 years, depending on the lender’s policies.
This financing option provides a higher loan amount and may be secured in nature. This means that you need to provide a financial asset as collateral to get this loan. Moreover, long-term loans may come with lower interest rates since they are secured.
However, since the interest is spread out over a longer duration, you may have to pay higher interest over the life of these loans. The monthly instalments, however, may be more affordable.
You can use these funds for substantial financial requirements, such as:
Key Differences Between Short-term and Long-term Loans
While both these options provide funds, the fundamental difference in their structure, purpose, and cost can significantly impact your financial health.
Check out the following long-term vs short-term loan comparison table to understand their difference and make a more informed decision:
| Basis | Short-term Loans | Long-term Loans |
|---|---|---|
| Tenure | These usually have a repayment period of upto 3 years | They come with a long-term loan period, which may range between 3 and 30 years |
| Collateral | They are usually unsecured in nature and don’t require collateral | They are generally secured loans, requiring you to offer collateral to get funds |
| Interest Rates | The interest rates tend to be higher | They generally come with lower interest rates |
| EMI Burden | EMI is slightly higher due to a shorter loan duration | As the loan period is longer, the EMI may be more affordable |
| Disbursal Time | They have quick disbursal time, usually ranging between 12 and 48 hours | Since these loans are usually secured in nature, their approval and disbursal process may take longer |
| Loan Amount Limit | Designed for swift financial assistance, they offer modest sums | They offer substantial sums for high-value purchases |
| Common Use Cases | Medical emergencies, vacation, home repairs, and more | Funding a child’s education, purchasing a house, home renovation, starting a business, etc. |
Which Loan Should You Choose?
Deciding between a short-term and a long-term loan requires careful assessment of your financial requirements and circumstances. The following are the factors to consider:
You may find long-term loans more suitable if you are young. This is because you have a longer earning horizon and repayment period.
A steady and reliable income stream is crucial for managing the consistent, often larger, EMIs of a long-term loan. Unstable income may make short-term loans, with their quicker repayment, a safer bet.
Short-term loans are ideal for immediate, urgent needs such as medical emergencies, car repairs, or bridging a temporary cash flow gap.
Long-term loans are better suited for substantial, planned investments like purchasing a house, funding higher education, or financing a business expansion.
Long-term loans generally require you to put up collateral. Hence, a short-term loan may be more suitable if you don’t wish to risk a financial asset.
If you can comfortably manage higher monthly instalments over a shorter period, short-term loans may be ideal. However, if you require the flexibility of smaller, more spread-out payments, choose long-term loans.
Benefits of Short-term Loans
Short-term loans offer several distinct advantages, making them a suitable option for specific financial needs. These include:
Short-term loans typically have streamlined application and approval processes. This allows for quicker access to cash when immediate financial needs arise.
Many short-term loans are unsecured, which means you don't need to pledge any assets like property or gold as collateral.
While the repayment period is shorter, some lenders offer various repayment options that you can tailor to your cash flow requirements.
For quick financing, it's perfect to choose a short-term loan for salaried employees and small businesses. It helps cover immediate operational costs or bridges a temporary cash flow gap without long-term commitment.
Benefits of Long-term Loans
Long-term loans, while requiring a more significant commitment, offer distinct advantages that make them suitable for substantial financial goals. Check out the benefits of this financing option:
Spreading the repayment over an extended period results in lower EMIs. This makes larger loan amounts manageable within your monthly budget.
Lenders are generally willing to disburse larger sums for long-term loans due to the extended repayment tenure, which mitigates their risk.
Interest (and in some cases, the principal) paid on certain long-term loans, like home loans or education loans, qualify for tax deductions. These tax benefits can significantly reduce your overall taxable income.
With lower and predictable monthly payments, long-term loans contribute to more stable cash flow management. It enables you to plan your finances with greater certainty.
Frequently Asked Questions
Can I switch from a short-term loan to a long-term loan?
Yes, certain lenders offer the loan restructuring facility, which allows you to convert your short-term loan into a long-term loan.
Is it better to get finance long-term or short-term?
The decision between these two loans depends on your financial goals. Long-term financing suits large investments like homes or business expansion, offering lower monthly payments. Short-term financing works for quick needs or smaller purchases, but it may cost more every month.
What is the duration of a short-term loan?
The repayment period for these loans ranges to up to 3 years.
What is the duration of a short-term and long-term loan?
While the loan repayment duration of short-term loans is up to 3 years, the duration of the long-term loans ranges between 3 and 30 years.
How do you choose a loan term?
You must choose a loan term based on your budget, financial goals, and repayment ability. Shorter terms mean higher monthly payments but lower overall interest.
Longer terms reduce the monthly burden but increase the total interest paid. Consider your income stability, future plans, and total cost before deciding.