Short Term Loan vs. Long Term Loan | Pros, Cons, and Mistakes to Avoid

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So you need a loan, but you’re totally confused and overwhelmed by all the different options out there? Here is a summary of loans to help you make the best decision for yourself and your business.

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So you need a loan, but you’re totally confused and overwhelmed by all the different options out there. You’re not alone! The seemingly endless terms, interest rates, and lenders can be impossible to figure out on your own. However, with the right research and expertise, you can become a total loan pro in no time and make the best decisions for yourself and your business. 

What Is a Short Term Loan?

Short-term loans have shorter repayment timeframes. Generally speaking, short-term loans may need to be repaid in as little as a few days all the way up to one year. The exact amount of time is negotiated and agreed upon with the lender at the time of signing. Since they need to be paid back quickly, short-term loans usually deal with smaller amounts of money. 

For example, there are cash advance loans or even payday loans where you can get some extra cash to cover emergency expenses. 

When you apply for a short-term loan, you have to provide documentation like bank statements and pay stubs. The lender will also run your credit report to get a good idea of your borrowing history and assess the risk of lending to you. That being said, since short-term loans usually deal with smaller amounts of money, it may be easier to get approved with less-than-stellar credit. 

What Are the Pros and Cons of a Short Term Loan?

Like anything, there are pros and cons to short-term loans that you need to be aware of before you sign on the dotted line. 

Some pros of short-term loans:

  • Short-term loans involve a quick application and approval process that can get you money quickly. For example, lenders like Seek Capital can usually get you your money within 24 hours. This is ideal for urgent or emergency scenarios where you need cash fast.
  • Lower loan amounts for short-term loans mean that you don’t have to spend years paying a loan back. Instead, you can pack the loan back quickly, move on, and free up more cash to use in other areas rather than on repayment.
  • When you’re applying for a short-term loan, you will likely have more borrowing options to choose from since you’re dealing with smaller amounts of money. You don’t have to go to a big bank for a short-term loan! Instead, this means that you can really shop around for the right fit with the best interest rates. 

Some cons of short term loans: 

  • Short-term loans may come with higher interest rates than long-term loans. That being said, the short timeframe means that even with higher interest rates, you won’t be spending a ton of money on interest over time.
  • Short-term loans may include fees and charges that help offset the risk of the lender. This is especially true if you’re looking for fast money. It’s always a good idea to read the fine print before signing anything so that you’re aware of all fees and costs associated with the loan.
  • You may not be able to borrow as much money with a short-term loan. The more you borrow, the more you’ll have to pay back in a very short time. So unless you’re in a unique financial situation that makes this possible, lenders will be hesitant to lend you large amounts of money with a short repayment time frame. 

What Is a Long Term Loan?

Long-term loans have longer repayment timeframes that can range from one year all the way up to 30 years. Like short-term loans, the exact timeframe is negotiated and agreed upon with the lender at the time of signing. Since they deal with longer repayment timeframes, long-term loans can deal with larger amounts of money. 

For example, mortgage loans are an example of a long-term loan that can take 15 to 30 years to pay off since you’re likely dealing with hundreds of thousands of dollars. 

When you apply for a long-term loan, be prepared to provide more documentation than you would if you were instead applying for a short-term loan. Generally speaking, lenders will require two years of income (pay stubs and W-2s), bank statements, and information about any current debt. The lender will definitely run your credit report and may not lend to you if your credit is below the 650 range as you present too much of a lending risk. Since lenders have to do more research and work for a long-term loan application, this process could take some time and may not be the best option if you’re looking for a quick process. 

What Are the Pros and Cons of a Long Term Loan?

Now that you know the basics of long-term loans, it’s time to go more in-depth. For example, there are also pros and cons involved with the use of long-term loans. 

Some pros of long-term loans:

  • Long-term loans allow you to borrow more money while still maintaining lower monthly payments since the amount is spread out over a longer period of time.
  • Long-term loans also usually come with lower interest rates. However, even with a low-interest rate, if your loan is repaid over an extended period of time, like a 30-year mortgage loan, you will end up paying a ton of extra money in interest no matter what.
  • When looking for a long-term loan, there are many different lending options to choose from. For example, you could choose to go with any big bank for your mortgage loan. However, there are also alternative lending options to consider. As always, be sure to shop around to get the best terms and interest rate to save you money over the course of the loan.
  • While long-term loan requirements may be stricter than short-term loans, the odds are that there are still options out there that will work for you, even if you have a lower credit score. 

Some cons of long term loans:

  • Long-term loans typically involve a more in-depth application process since it’s riskier for the lender to give out more significant amounts of money. As a result, it may take time for you to get approved and actually to get your money.
  • When you take on a long-term loan, you are committing to being in debt and making payments for a long period of time — sometimes several decades. During this time, interest can really rack up and end up being almost equal to the amount that you originally borrowed.
  • Like short-term loans, long-term loans may include fees and extra costs in order to apply and process them. Always be sure to investigate these fees before you sign so that you don’t end up paying more than you expected. 

Mistakes to Avoid When Applying for a Loan

Applying for a loan can be stressful, don’t make it harder on yourself by making mistakes that could hurt you in the process. Here are some things to keep in mind when applying for a loan to increase the likelihood that you’re approved and receive your money in a timely manner:

  • If possible, don’t apply for a loan without first checking your credit report. The lender is going to check it, so you need to know what’s on there. Mistakes happen, and if there’s anything you need to dispute, you should do it beforehand to give you the best possible credit score.
  • Always shop around with different lenders before deciding. Oftentimes, different lenders will offer different interest rates and come with different fees and added costs. Go with the one that makes the most financial sense and will save you the most money both now and over the lifetime of the loan.
  • Don’t make any sudden or drastic moves that will affect your credit report. For example, don’t open up a new credit card or make a large purchase on an existing credit card. It’s also not a good idea to close out an existing account. Avoid gaining new debt or even paying off large amounts of existing debt, as that could actually end up temporarily lowering your credit score. 

Wrap Up

There’s a lot to consider when choosing between a long-term loan and a short-term loan. For example, you may have to sacrifice by agreeing to a higher interest rate on a short-term loan if you need money quickly. On the other hand, you may end up paying tons of money in interest over the years on a long-term loan — no matter how low your interest rate is. At the end of the day, you will have to weigh the pros and cons of each for your personal financial situation. If you’re feeling stuck between these choices, feel free to reach out to Seek Capital for expert financial advice when it comes to loans. 

Sources:

https://www.consumerfinance.gov/ask-cfpb/how-do-i-dispute-an-error-on-my-credit-report-en-314/

https://www.consumer.ftc.gov/articles/0189-shopping-mortgage

https://www.cnbc.com/2019/03/01/these-moves-can-hurt-your-credit-score.html

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