Short-Term Vs. Long-Term Loans: Know The Difference
There are any number of industries served by loans. New business owners may need to borrow money to start their company. Established businesses may need money to cover costs.
At times, it can be difficult to determine which version of a loan is best. They can be tricky. Let’s consider the basics: In order to pay off your loan, there will be a specific timeframe. Whether from a couple of months to a couple of years, it might be on the shorter side. Then again, you may decide to take a decade or more to completely pay back the money. For each of these options, there is an upside and a downside. Depending on your loan scenario and other factors, one may be a better fit for you and your company.
Here we will examine short-term vs. long-term loans and how they differ.
High interest loans are more likely to be offered for short-term borrowers. Though significantly higher interest rates apply here, these types of loans from private lenders do tend to be more flexible and lenient. As much as possible, shorten the repayment period.
Lower interest rates frequently apply to longer-term loans. Remember, however, the longer you take to pay off that loan, the more interest you’re paying (over time). Clearly, paying a loan off as quickly as possible is the best way to go – regardless of whether it’s long-term or short-term.
The Process for Approval
Both the application process and the approval process are usually quicker for short-term loans, generally speaking. A lender might be more apt for short-term loan approval because the commitment is shorter. Regardless, the lender wants to know for certain that the borrower will pay the money back – the risk just seems less if the payback duration is shorter.
To prove to the lender your company is a good risk, more documentation may be required for a long-term loan. More research and more documentation means more time before you can actually receive the loan.
Schedule for Repayment
You may need to make more frequent payments with a short-term loan because it doesn’t go on for as long as a long-term loan does. You might need to make biweekly payments or even more frequent payments if the loan is only, for example, for a few months. Long-term loans, on the other hand, may require monthly payments, or every few months, or even quarterly. So it’s not a good idea to do a short-term loan if your company doesn’t generate a steady income.
Amount of Your Loan
Ordinarily, you will borrow a smaller amount of money with a short-term loan. Lenders may not be willing to shell out a large amount of funding if the payback time is considerably brief. They worry you may not be able to pay back such a large amount so quickly.
Because far more borrower research is done on the part of the lender for a long term loan, and they’re relatively assured the borrower is low risk or no risk, larger amounts are not uncommon with long-term loans.
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