A loan is taken for a bigger sum and that is payable in more than 3 years is a long-term loan. In contrast to this, a loan taken for a lesser duration is a short-term loan. The tenure of the loan is the main difference between them. Both these loans can be used for different requirements, and other than the tenure, they include various other distinguishing features as well. Understanding the features of both loans can help you decide which loan is better for you.
Factors Deciding the Better Option Between a Long-Term Loan and a Short-Term Loan
- Tenure: The main difference between a long-term loan and a short-term loan lies in the tenure of the loan. A long-term loan may stretch from 2 to 25 years, while the latter is taken for not more than 36 months. If you need a smaller amount and can pay back the loan easily in this duration, a short-term loan is the better choice because if the duration is less, the interest paid is also less.
- Purpose of the Loan: A long-term loan is always purpose specified. Like a home loan can be used only for building a house or a car loan can be used only to buy a car. Thus if your need is certain then a long-term loan is advised as it may include many offers as well. But one thing to keep in mind is that a long-term loan will always verify if the money is spent on that particular purpose or not, so the burden of proof lies on the borrower under this loan.
While a short-term loan is not purpose specified and it can be used for any need. No proof is required to present where the money is spent. That is why it is the best way to meet fluctuating financial needs.
- Interest Payable: In a long-term loan, the money is credited in a lump sum, hence the interest is payable on the full approved sum. The interest is calculated on a fixed rate of interest and distributed equally in monthly EMIs for the full tenure of the loan. Whereas, in a short-term loan such as a line of credit, the interest is charged rationally when you use the money.
- Repayment System: In a long-term loan, every installment remains the same unless you take a loan with a floating rate of interest. Every month, a fixed sum is repaid to the lender and the same is continued till the loan is fully paid back. It also includes a late payment fee, which is imposed if the monthly installment is not made on the due date. Opposite to this, in a short-term loan, the repayments can be made in variable installments. Not always the monthly due is fixed and within the pre-planned tenure, at any time, the loan can be paid back.
- Repayment Capacity: This plays a driving role in deciding whether you go for a long-term loan or a short-term loan. If you have a bigger need and have the capacity to pay back the fixed monthly installments, then only you should go for a long-term loan. Because apart from the interest, the loan can be heavy on your pocket with charges like late payment fees or any other penalties. Albeit, paying back a short-term loan is comparatively easier than a long-term loan. Managing the repayment in a small capacity is possible because the loan can be paid back in variable EMIs. If the budget doesn’t allow, only with the minimum monthly due the payback can be done.
- Cost of the loan: The processing fee is directly proportional to the sum borrowed. Since in a long-term loan, the sum is higher, the processing fee automatically becomes high. While a short-term loan is borrowed for a smaller amount, it doesn’t include the high cost of approval. No hidden charges or penalties are applied, which even make the short-term loan cheaper and better.
These features and differences tell that the choice of the loan may depend upon your need and payback capacity. Yet, going for a short-term loan is advised because it is light on the pocket and multipurpose. A line of credit is a short-term loan that can be used for various fluctuating requirements. The best part is, interest is payable when the money is used and only for the used portion.
Flex Salary offers you a line of credit at a comparatively smaller rate of interest than the market. We offer our services to salaried employees only. You can apply for a loan from 4,000 to 2,00,000. The documentation is less, and there is no collateral. If you need a short-term loan at an affordable rate of interest, we could surely be the right choice for you.