There are lots of reasons why you might decide to get a business or personal loan. You might need some money to make a personal purchase such as a home or to help smooth out your business’s cash flow. Although the amount you need factors into the types of loan you apply for and the lenders you prefer, that is not the only thing you have to think about when you apply for a loan. You also need to think about how short term or long-term loans can affect your financial health. Below, we will look at both of these types of loans to help you decide which is better for your financial health.
Short Term Vs Long Term Loans
Before considering which would be better for you, it is important to understand what these types of loans are. Both short term and long-term loans are considered term loans, meaning they are loans that are repaid with interest within a certain amount of time. The amount of time you have to pay back the loan is what distinguishes short term from long term loans. There is another distinction in that short-term loans will usually include higher interest rates and often give you access to less money than long-term loans.
Long Term Loans Can Help You Build Wealth Faster
Long term loans will normally have a lower interest rate than short term loans. If you get a long-term loan, less money will be going to servicing the loan than if you decided to go with a short-term loan. This means you can save a little bit of money even when servicing a long-term loan – something that is significantly harder if you are carrying a heavier debt load that is caused by a higher interest rate.
With these savings, you can invest or put the money into a retirement fund. In addition, loans that offer the amount of money you need to make a significant purchase, for example a home, are usually offered as long-term loans. This is also true of the loans you need to make a significant investment into something like land or real estate. These long term investments made possible by long term loans are the perfect example of long term wealth building.
Short Term Loans Can Help You Save on Debt
When you default on a payment, you will likely be listed as a defaulter and the payment will become a debt. The debt might come with late fees and a higher interest rate if the debt is a loan. If you are sure you are going to get the money shortly but not in time to avoid paying late fees and other charges, you could get a short-term loan.
Try to shop around for short term loans that have favourable terms so that what you pay as interest on the loan is not more than any additional money you would have paid on the debt. Getting a short-term loan that you use to avoid getting into debt also protects your credit score from taking a hit, which could happen if you are listed as a defaulter. If you want to learn of other ways to avoid or get out of debt, these tips will help. New Horizons is a loan broker that gives you access to a panel of lenders who provide different types of loans, including short term loans that can help you stay out of debt. These lenders do not do any credit checks when you apply for a loan and they approve loans instantly. They can even fund your account in as little as 15 minutes once your application is approved.
Short Term Loans Can Make Your Life Significantly Harder
When you have a short-term loan, you will be under pressure to make payments on time and not miss any so that the loan does not affect other aspects of your life. This is usually the case for loans such as credit card debts or short-term business loans. Some lenders also question why you qualified for a short-term loan and not for a long-term loan which makes them see you as a potential liability.
Long Term Loans Are Better for Business
When you are looking for funding for your business, you might turn to a loan. The loan you get should have an interest rate that is low enough to allow you to pay it off even when your business is in its infancy. You also need a significant amount of money. Long term loans tick both of the boxes above, which makes them significantly better for people looking to start a business.
Long Term Loans Diversify Your Capital Portfolio
Long term financing affords you the flexibility and gives you the resources you need to fund several investments at a time without having to rely on one source of financing. Because of this, you can spread your risk and debts, which is always good for your financial health.
Short Term Loans Make It Easier to Get Out of Debt
Short term loans are usually a smaller amount than long term loans which means you have a smaller debt burden and can pay it off relatively quickly. Long term loans accrue interest for a longer time. This has two effects; you end up paying significantly more than you borrowed and you pay the loan over a long time. If anything happens between the day you get the loan and when you are supposed to make the final payment, you might end up with a huge debt which can have detrimental effects on your life.
Short Term Loans Help Keep Things Moving
A significant difference between short- and long-term loans is how they are approved. Short term loans are usually issued with few to no financial and background checks. Short term loans are also approved very fast, usually in 24 hours. Combine these two things and you have a faster borrowing process and faster funding for your venture or personal need. This way, you can keep your business moving.
Because of their faster approval, short term loans can help you cope with unexpected demand, work on a project that requires additional equipment and supplies, or any other number of similar situations. Because of your ability to take advantage of these opportunities and the ability to fulfil these needs, your business will be financially better for it.
Long term loans, on the other hand, usually involve stringent background and credit checks. Even when you pass these checks, the loan might take a few weeks to land in your account. By that time, the opportunity you had discovered might be gone.
If you want to take advantage of opportunities faster, it is always better to consider short term loans.
Both short term and long-term loans have their pros, cons and differing effects on your financial health. If you are looking to build wealth or make long-term investments, then a long-term loan is what you are looking for. If you are looking to move fast and build wealth fast or repair your financial history, a short-term loan is the better option for you. Just don’t forget to weigh the pros and cons of both loan types before choosing one.