Long Term Or Short Term Loans: Which should you choose?

Published on: 20 November 2020

Modified on: 12 April 2023

Tech has served as well. As we transition from 2021 to 2022, we’re well past the fragmented fintech systems of the past, if they could be called fintech at all. Now, it is now easier to take personal loans to meet urgent needs, as both online and offline methods of application have been simplified. With online personal loan applications, you can receive quick credit with minimal paperwork. Some banks provide salaried individuals with personal loans pre-approved up to a certain amount. Interest rates also differ depending on various factors like your credit score and the lender. 

All of our loans, though, can be categorised into short term and long term loans.

What are short and long term loans?

Short term loans

Short term loans have a repayment tenure of less than a year. They are generally appropriate for small, immediate capital requirements. These are usually unsecured loans that require no asset commitments. The paperwork required is minimum. Nowadays, you can quickly obtain a short term Instant Personal Loan online with any leading bank or digital lender like Fibe. 

The interest rate may be higher as the loan tenure is shorter. Loans under this category would include, for example, credit card loans, Instant cash loans, advance salary loans etc. Digital portals like Fibe provide you with an Instant Personal Loan with minimum hassle. 

Long term loans

Long term loans have a longer reimbursement tenure ranging anywhere from 24 months to decades, depending on the type of loan. These loans are generally suited for borrowing large amounts of capital. 

While the interest rates are generally lower than short term loans, the total ratio of interest paid to the borrowed amount is much higher. Loans under this category would include home loans, car loans, large personal loans, loans for long term hospitalisation expenses, etc. 

Short term loans vs long term loans: How do they differ?

Short term or long term loans have their share of differences. Your unique requirements will help you determine the type of loan most suitable for your needs. You can choose the type of loan you want by using the information below alongside identification of your needs, budget, comparison of lenders available and then zero in your loan.

• Tenure 

Short term loans: These loans have a flexible repayment tenure ranging anywhere from 90 – 360 days. 

Long term loans: These loans are repaid over a year or more.

• Rate of interest

Short term loans: The interest rates are generally higher because repayment tenures are shorter.

Long term loans: The interest rate of these loans is lower since the tenure for repayment is longer compared to short term loans.

• Documentation

Short term loans: There is minimal documentation. At Fibe, there’s zero paperwork.

Long term loans: In the case of long term loans, the lender can request additional documentation for collateral assets as well.

• Collateral 

Short term loans: There is no need for collateral.

Long term loans: Collateral is required and in most cases, you have to submit security documents to the bank.

• Accessibility

Short term loans: You can apply for short term loans easily online. Approvals are usually dispersed within a few days.

Long term loans: You can start the application process online, but offline verification is usually involved. Hardcopies of collateral documents usually have to be deposited or mailed to the lender. The approval times are longer as there are more rigorous documentation checks.

• EMI Amount

Short term loans: They have high EMIs because they have a short repayment period. 

Long term loans: In this case, the payment gets dispersed over several months. Therefore the EMI is lower per month.

Which loan should you choose?

The ratio of cumulative interest paid to the borrowed amount is smaller with short term loans as compared to long term loans. Thus, if your credit requirements are not too high and you can pay a higher monthly EMI, choose a short term loan so that you pay the least amount of interest.

If your monthly budget is limited, you can opt for long term loans to reduce the EMIs, with an extension of repayment tenures.

If you are looking for smaller credit amounts, short term lending is suitable, but long term lending is more fitting if the credit requirements are high.

For your credit history, long term loans carry more weight as the loan extends over a long time and regular payment of EMIs has a positive effect on credit scores.

Which personal loan is right for you?

The market clearly has many financial instruments, each with different characteristics and advantages. While choices differ based on the amount of credit required, your monthly budget, and interest rates, hopefully, this post has helped you decide the right pick for yourself.

Frequently Asked Questions

What is an example of a long-term loan?

Long-term loans are those loans that are paid off for an extended period of more than 3 years. A home loan is an example of a long-term loan.

What is the difference between long-term and short-term borrowing?

A long-term loan has a longer repayment tenure with lower interest rates. Short-term loans are spread over a shorter term. However, you may have to pay high-interest rates.

Can I get a loan for 10 years?

Yes, you can get a long-term loan for 10 years, provided you meet the eligibility criteria set by the lender.

Can I get a personal loan for 7 years?

While most personal loans have a repayment tenure of up to 5 years, you may get one for a tenure of 7 years, depending on the lender. These are called long-term personal loans.