Is it better to have a shorter or longer loan term?

17 AUGUST 2023

Retail loans differ from conventional commercial loans in that they are not collateralized; instead, they are based on your creditworthiness.Woman with a turban on, smilingWhen you require additional financial assistance, a loan may be able to help. Maybe you had an unexpected expense, or maybe you want to expand your business and need additional funding to do so. In either case, you want to obtain a loan that is appropriate for your situation.

When you're in a bind, a short-term loan can be your best option if you need to pay for unforeseen expenses, like an unanticipated hospital visit or urgent car repairs.

Long-term loans are typically obtained for bigger financial obligations. They are reimbursed over a longer period of time, as the name implies, as opposed to a short-term loan, which is paid back within a few weeks or months. Below we’ll take a look at the pros and cons of a shorter VS longer loan term.

Advantages of a shorter loan term

Ease of access.

No collateral is required as security when applying for a short-term loan. Not all short-term loans require good credit; some can be approved even without one.

Faster debt repayment.

A loan with a shorter duration will enable you to pay it off more quickly.

Smaller loan amounts are accessible.

If you don't need a significant sum of money, a short-term personal loan can save you from borrowing more than you really need.

Disadvantages of a shorter loan term

Greater interest rates.

In general, short-term loans have interest rates that are higher than long-term loans. Calculating the cost of a short-term loan in comparison to a long-term loan with a lower interest rate is advisable.

Expensive expenses

The charges associated with short-term loans, including initiation fees for processing the loan and late payment penalties, may be significant.

Offers only a short-term fix

A short-term loan is only meant to address short-term cash flow problems; it cannot be used to address long-term financial needs.

Advantages of a longer loan term

Lower monthly payments

With a long-term personal loan, repayment is spread out over a longer period of time, so your monthly payments will often be lower and easier to handle than with a short-term loan.

More flexibility

You don't necessarily have to take the full amount of time to pay off your loan just because you opted for longer payback terms. If you have some additional money, you can sometimes opt to make extra payments. Many of the advantages of a shorter-term loan will still apply to you if you use this technique, but you will have the flexibility of only paying the minimum repayment when you don't have additional cash.

Build your credit credit record

Your credit score can go up if you make on-time payments on all of your personal loans. You have more time with a long-term personal loan to make regular payments.

Disadvantages of a longer loan term

It can end up costing you more

Although long-term loans typically have lower interest rates than short-term loans do, long-term loans require you to make interest payments for an extended period of time. Here, it's crucial to run the numbers to determine which choice will get you what you need with the lowest expenditure on interest payments.

Longer debt

A long-term personal loan used incorrectly may increase your financial stress for years if you are having trouble. This can affect your health and wellness.

Affects your debt-to-income ratio

Your debt-to-income ratio may increase when your debt load increases, which might make it more difficult for you to qualify for additional lending products. You may wish to delay acquiring a personal loan or choose one with a shorter duration if you know you'll need an important lending product during the repayment of a long-term personal loan, such as a mortgage.

Uncertain as to whether a long-term loan or a short-term loan is best for you? Making this decision might be challenging, but looking at the numbers can make it simpler. Think about how the length of the loan will affect your monthly payments and the total amount of interest you'll have to pay, and then take it from there.