Borrowing is a financial tool, on which millions rely – from mortgages to start-up loans and beyond. Borrowing is also an understandably stressful endeavour for businesses and individual consumers alike, and especially for those new to it.
When interest rates are at their highest in years, lending can seem particularly risky – but understanding lending properly is half the battle. There are two key types of lending, in the form of long- and short-term loans. What are their advantages and disadvantages?
What is a Long-Term Loan?
A long-term loan is arguably the most common kind of loan, and one with which most people will be the most familiar. A majority of personal loans offered by major lending institutions like domestic banks operate on a long-term model, wherein an amount of money can be borrowed and repaid over a relatively long repayment period.
Businesses also commonly make use of longer-term loans to fund growth and expansion, with limited consequences for short-term cashflow and long-term financial growth. Long-term loans typically allow larger amounts of money to be borrowed, owing to the length of time over which the debt can be repaid. There is naturally a set of criteria that borrowers need to meet in order to properly qualify for long-term loans, but this consists chiefly of measuring credit history and regular income.
What are the Pros and Cons of Long-Term Loans?
The major advantage of long-term loans lies in the longer repayment period. Not only does this enable borrowers to borrow larger sums of money, whether for significant business growth or the purchasing of a new asset, but it also enables borrowers to spread the cost of their debt over time. This means that the debt won’t have a meaningful impact on monthly budgets or short-term affordability.
The advantage can quickly become a downside, though, if financial difficulties make it difficult to keep up with repayments. Holding debt for such a long period of time can become tough, and the financial consequences for failing to keep to repayment terms can be high.
What is a Short-Term Loan?
A short-term loan is, predictably, a loan which is taken out and paid over a much shorter time period. Generally speaking, the repayment terms will bake in a period of a year or less. These loans are of a smaller value than long-term loans, and also come attached with higher rates of interest.
What are the Pros and Cons of Short-Term Loans?
The leading disadvantage to the short-term loan is the high rate of interest. Individuals and businesses alike can spend a premium for short-term access to money; however, short-term loans can often be much quicker and easier to secure than long-term ones. If one needs a quick cash injection and has the means to pay it off quickly, this is a good option – but fees and charges can mount if not repaid in a timely manner.