Trying to get out of debt quickly? Picking the right Loan can make all the difference. Both short term loans and long term loans come with their own pros and cons. The main challenge is determining which loan type better aligns with your current and anticipated needs.
The Bank of England’s base rate is predicted to reach 5.8% by March 2024, before falling to 3.6% in the next five years. (Data as of date: 19th Sept 2023)
Such shifts in the financial landscape can make the choice between short-term loans in the UK and long-term loans more complex.
If you want a guide to help you tell the two apart, keep reading and decide which (if either) one suits your financial situation.
What Are Short Term Loans?
Short term loans are financial tools designed for brief periods, often spanning from a few weeks to a year. These loans, common in the UK, are generally smaller in amount and are meant to be repaid faster, usually within 6-12 months.
When unexpected costs strike or emergencies arise, short term loans can help. Whether it’s an unforeseen car repair or a home renovation, these loans serve as a quick fix. There are short-term loans that even cater to those with a less-than-stellar credit report, often referred to as bad credit short term loans.
A few noteworthy examples include personal loans, payday loans, and loans taken for the purpose of paying back medical or utility bills.
What Are Long Term Loans?
Long term loans offer borrowers a prolonged repayment window, sometimes stretching over several years. With a long-term personal loan, you could apply for a loan amount up to £50,000, sometimes without the need for any collateral depending on the lender.
Considering a significant investment, like starting a business or financing a home renovation? Long term loans can be an aid in these situations.
Mortgages, car loans, and education loans also come under the wing. Since the repayment period may stretch to years or even decades, you can get a much lower interest rate compared to short term loans.
Key Differences Between Short Term and Long Term Loans
When considering taking out a loan, it’s vital to weigh up your options. While both short term and long term loans can provide the financial relief you’re after, they come with distinct characteristics that can have vastly different implications over time.
Here’s a side-by-side comparison to clarify their differences:
| Criteria | Short Term Loans | Long Term Loans |
| Loan Duration | Typically, up to 1 year | Often several years to decades |
| Interest Rates | Generally higher due to shorter term | Typically, lower compared to short-term loans |
| Monthly Payments | Larger monthly payments owing to a condensed repayment schedule | Smaller monthly payments spread out over time |
| Total Repayment Amount | Often less interest over the loan term | More interest paid over the duration due to prolonged interest accumulation |
| Approval Speed | Quick, sometimes within 24 hours | Might take longer due to detailed credit checks |
| Flexibility | Less flexibility in terms of refinancing | Potential for refinancing or adjusting terms |
| Usage | Best for immediate, short-term needs | Ideal for significant investments or purchases |
The Impact of Loan Duration on Monthly Payments
The loan’s duration directly influences your monthly payments. Shorter-term loans, with their condensed repayment schedules, usually come with larger monthly payments. These might be harder to manage for some, but they ensure the debt is cleared quickly.
In contrast, a long term loan spreads out the debt, resulting in smaller, more manageable monthly payments, though for an extended period. That said, depending on your lender if you decide to pay off your short term personal loan early, you could face early repayment fees. So, it’s best to go over the contract in detail before signing up for a long term loan.
Benefits of Short Term Loans
Shorter-term loans offer a range of benefits for individuals and businesses alike. Here are some key advantages:
1. Quick Debt Clearance and Less Interest Over Time
One of the main benefits of a short term loan is their shorter repayment period. It means you can clear the debt swiftly with little to no extra charges. While interest rates might be a tad higher than long term loans, the total interest paid can be less due to the shorter timeframe.
2. Evading Lengthy Financial Ties
With these loans, you’re not bound by a financial commitment for years. They offer flexibility, allowing borrowers to steer clear of drawn-out obligations.
3. Lack of Collateral Requirements
Shorter term loans don’t usually require a collateral commitment. You can apply with less documentation and clear the debt without much formal interference from the lender.
4. Ideal Situations for Short Term Loans
Short-term loans are ideal for addressing unexpected financial emergencies, such as medical bills or car repairs, where immediate funds are necessary.
Drawbacks of Short Term Loans
Despite their undeniable advantages, it’s essential to know that short term loans typically come with their own set of challenges. Understanding these can help in making informed choices.
1. Higher Monthly Commitments
While you’ll be free of debt faster, the monthly repayments can be steeper. It’s a faster route but requires you to set aside a larger chunk of your income each month.
2. Ensuring You Can Truly Afford It
Before applying for a short term loan, it’s crucial to assess if you can comfortably meet the repayment demands. Always use a loan calculator and review your finances.
3. Situations Short Term Loans May Not Suit
Planning a big house renovation or considering higher studies? Situations requiring substantial amounts might be better suited for long term loans or a long term unsecured loan.
To know more, read our guide on advantages and disadvantages of short term loans.
Benefits of Long Term Loans
Long term loans stand out for many seeking substantial monetary support. Here are the main advantages:
1. Lower Monthly Payments
One of the primary boons of long term loans is the luxury of paying smaller monthly sums. Spreading out your repayment over an extended period means more manageable monthly payments. This can free up your budget for other immediate expenses.
2. Bigger Purchases Made Easy
Need money to finance a house, a car, or a dream wedding? A long term loan grants you the ability to cover such significant expenses. With more extended repayment periods, you can plan and secure larger costs without the immediate financial burden. You can also utilise long-term loans for higher education.
Drawbacks of Long Term Loans
While they have their perks, long term and short term loans differ significantly. It’s essential to weigh in on the potential downsides.
1. The Interest Trap Over Time
Yes, monthly payments are lower. But, over the loan’s extended period, you might end up shelling out more in interest, especially if you don’t secure a competitive rate. That’s the difference between short term and long term loans.
2. Tying Up Financial Goals
Securing a long term loan means a long-standing commitment. This can sometimes impede other financial goals or aspirations. It’s crucial to ask, “Is this commitment aligned with my long-term objectives?”
3. Managing Payments with Care
Having a loan for several years requires diligent financial management. You might wonder, “What credit score do I need for a loan?” A good credit score can get you favourable terms, but maintaining it demands responsible loan management.
Considerations for Choosing the Right Loan
Whether you’re eyeing the best short term loans or considering long term loans, a few essential considerations can guide your decision.
- It’s crucial to reflect upon your financial needs and future goals. Are you aiming for a quick resolution or a longer commitment? Understanding this can clear the fog surrounding the difference between short-term and long term loans.
- We can’t stress enough the significance of budgeting. Be it tackling a bad credit short term loan or managing long-term obligations, a well-planned budget is your road map.
- Sometimes, the nitty-gritty of long term and short term loans can be overwhelming. In such instances, seeking professional advice can shed light on complex scenarios, ensuring you tread the right path.
Final Words
In the journey of financial empowerment, understanding the intricacies of loans – be they short or long term is crucial. Every borrowing decision you make today paves the way for your financial future. Remember, it’s not just about seizing any opportunity but about grabbing the right one, aligned with your goals. You need to make the informed choice and secure your financial well-being.
Frequently Asked Questions
Is It Better to Get a Short Term or Long Term Loan?
For many in the UK, short term loans are a preferred choice because they’re generally quick, secure, and have shorter repayment terms. Yet, the best option varies based on personal financial situations and goals.
Why Are Interest Rates on Short Term Loans High?
Short term loans, especially ones like bad credit short term loans, tend to have higher interest rates. This is because they’re often seen as riskier by lenders since they have shorter repayment windows.
Why Do Banks Prefer Long Term Loans?
Banks often provide a steady stream of interest income over a more extended period. However, the drawback for borrowers is the prolonged commitment, which might not always be ideal depending on one’s financial objectives.
How Many Types of Loans Are There in the UK?
In the UK, there’s a broad array of loans like long-term unsecured, payday, mortgages, student, personal, and business loans. With over 16 types, there’s a loan for nearly every need.
What Is Considered a Long Term Loan in the UK?
A long term loan typically means a loan that lasts more than three years. This can be a relief for many borrowers as it spreads out the repayment, resulting in smaller monthly amounts. However, one should be aware of the longer commitment.
Disclaimer: The information given above is provided for reference only. This is not financial advice.
Related guides:
How to Calculate Interest on a Loan in the UK
Short Term Loans vs Payday Loans: Key Differences Explored
Payday Loans vs Instalment Loans: A Comprehensive Guide
