The major differences between long and short term loans

The human condition has become such that we don’t always have the money we need, or want, for the things we choose to buy. Banks have provided a solution to this with loans, but for individuals hoping to secure a loan, there is often a lot of confusion and uncertainty. Which loan is the best? Should you take out a long term loan and be indebted for years; or a short term loan for a smaller amount? There are many debates about the subject and everyone has a point of view when it comes to which loan is the ideal one to take. But for your personal needs, how should you decide? What are the major differences between long term and short term loans?

Money and interest rates

The biggest difference, other than the timelines, that exists between short and long term loans is the interest rates and the amount you are allowed to borrow. A short term loan will allow for smaller amounts to be borrowed for a shorter period of time, but usually at a higher interest rate than that of a long term loan facility. A long term loan will usually be taken for a larger amount of money – at a slightly lower interest rate, dependent on the lending institution, and the deal structure.

Repayment terms

Not every financial institution or lender will have precisely the same repayment terms. For some, an amount of R100 000 lent may need to be repaid over 60 months, while others may require the same amount to be repaid after 36 months. Others may present alternatives. What is important to note here is that the repayment terms should fit neatly into your monthly budget to cater for affordability. If you are considering taking short term loans, and you work out that the monthly repayment amount will be too high, a long term loan may be a better solution for you. Even if the amount is not that much higher than the short term loan it is still more prudent since monthly repayments are manageable.

A responsible lender, a responsible borrower

When considering the difference between loan repayment periods, do not neglect to consider the institution you are going to borrow the money from. Ideally, you should be borrowing from a responsible and accredited financial institution. Other lending houses, and loan sharks, may place you in a precarious financial situation with very restrictive and strict terms.

Making your choice about whether to go with long or short term loans is not one to be taken without deliberation. If you don’t make a smart decision before you borrow, you may find yourself spiralling into uncontrollable debt cycles in later years, ones that you may struggle to get out of. For reliable assistance and expert facilitation with short term loans, personal loans and associated services contact us at MBC Finance

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