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Last updated: 24 August 2021
When it comes to borrowing money, there are so many options that it can be overwhelming. A key thing to distinguish before you start is whether you're looking for a short term or long term borrowing solution. This guide will take you through the pros and cons of both. Ultimately, if you are looking to borrow larger amounts of money for a more substantial project, a long term loan is for you. In the same way, short term borrowing is useful for those who need a smaller sum and can pay it back relatively quickly.
What is a long term loan?
Long term loans are usually a secured debt that is paid off over a long period of time - typically more than a year. These types of loans are paid back over a pre-planned monthly schedule and will generally be for large sums of money. The most common long term loans are borrowing in the form of mortgages. They are often ‘secured' which means the bank will take a high value asset (such as a house or car) and use this as collateral should you be unable to pay back the loan. Put simply, they have the ability to repossess that asset should you fail to make the payments. Typically, only the borrowers with the best credit scores will be eligible for long term loans that are unsecured, so you should compare loans before making your decision.
Advantages of a long term loan
- Lower monthly payments, making it easy to manage and budget.
- As with the lower monthly payments, you'll have a longer term to pay it back which can be less stressful because you don't have to pay your debt back immediately.
- Useful if you are looking to borrow large sums of money, such as a mortgage or a student loan.
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Disadvantages of a short term loan
- Because of the longer period plus interest, you’ll end up paying more money than you initially borrowed.
- Early repayment fees, often long-term lenders will charge you for repaying loan before the agreed period.
- Long term loans are more substantial, and with this comes the likelihood of higher fees and charges.
What is a short term loan?
Short term loans are usually an unsecured form of borrowing that will be paid back in a few months or less. These will be for small sums of money and can come in the form of payday loans or personal loans. Short term loans are much more readily available and will often be ‘unsecured' because they are less risky for the lender.
There are a few important things to look out for with short term loans. Ultimately, getting into debt is never preferable so if you're looking for a short-term loan you should make absolutely sure it's necessary, and compare loans before you commit to one.
Advantages of a short term loan
- The application process is quick and easy
- If you have a poor credit score, you'll have more borrowing options available to you.
- You'll end up paying less interest because there is a shorter repayment period.
- There generally won't be early repayment fees.
Disadvantages of a short term loan
- It will have to be repaid much more immediately so it may be difficult to budget your monthly outgoings
- Particularly with payday loans, there is the possibility of rollover interest if you fail to make the repayments on time. This can quickly add up and make it incredibly difficult to get out of debt, it's often the case with short-term loans that people are using them to pay back previous short-term loans.
- Not generally able to borrow large sums of money.
If you're looking to borrow a relatively low sum of money, a better option could be a 0% interest credit card. Often, credit card companies will offer you interest free borrowing for the first two years, this can be a great way to build up your credit without getting into unmanageable debt. However, it's important to remember to pay back the credit card balance on time because the fees can quickly add up and it will negatively affect your credit rating.