Decoding The Difference: Short Term Loan Vs Long Term Loan
Every business enterprise, big or small, eventually needs multiple sources of finance in order to function smoothly. This is especially true in the case of start-ups and new businesses that require large sums of money at the beginning to get the ball rolling.
Now, there are a number of ways to procure finance for your business or even get a home loan, but the question to ask yourself is whether you need a short term or a long term means of finance. The two types of loan are vastly different from one another in the way you go about applying for them and also in their interest payments and the amount of risk involved.
Understanding your business or general financial needs is the most prominent part of the loan procurement process, since a wrong assessment of your requirements could quite possibly lead to significant financial loss in the future. Once you have a clear idea about the kind of monetary support you require, you can go about deciding on the kind of loan that fits the bill.
First, let’s look at a short term loan definition to better grasp exactly what we are dealing with here.
Short term loans, also known as payday loans, are essentially loans with a validity period of 3 years or less. This means the loan has to be repaid within a time period ranging from 0 to 3 years.
Long-term loans however have a statutory payback period of more than 3 years. The repayment period for long term loans can extend from 3 years to 30 years.
You shouldn’t simply assume that the difference between the two is purely in the naming. The actual distinction between short term vs long term loans is quite wide and requires comprehensive understanding of the different components that make the two varieties of loans unique. Here, we’ll guide you through the process step by step, minutely dissecting each dissimilarity as we go along.
Interest Rates Charged
One of the most prominent distinctions between short term and long term loans is the rate of interest you are charged for them. Since the interest rate of any mortgage factors in components like loan period and risk involved in the transaction, the interest charged for short term loan is considerably lower that what it is for a long term loan. Since the interest rate is lower for short term loans, they are generally preferred by borrowers who have limited finances and can’t pay huge amounts of interest.
Another major distinguishing feature for short term and long term loans is the risk associated with them. Since long term loan repayment is generally spread over an extended period of time, the risk involved becomes higher. The chances of the borrower missing out on the payment cycle are considerably increased when the time period of repayment is more than 10 years. With short term loans, the risk becomes less since the repayment process doesn’t extend beyond 3 years.
Ease Of Access
Generally, short term loans are easier to obtain than long term ones. The main reason behind this can be attributed to the fact that short term loans are financially risk-free, especially when compared to long term loans. The banks have more to lose with long term loans than with short term ones thanks to the large sums of money involved.
This makes short term loans ideal for borrowers looking for a quick source of finance without dabbling in the complications involved with obtaining a long term loan.
Purpose Of Procuring Finance
Another defining difference between the two variants of loan is the purpose that drives the borrower. With short term loans, it is usually the urgent requirement of cash on a short notice, while with long term loans, usually the money is needed for large investments or for projects that require large sums of money.
Some short term loan examples are account payable, short term leases, and bank overdrafts. Long term loan examples on the other hand include shares, bonds, long term bank loans, and retained earnings.
The monetary requirement of each client is distinct and there are a lot of things to consider before applying for a particular type of loan. You’ll have to carefully analyse your finances and the features of each type of loan available in the market before coming to a conclusion. Financial service providers like Bajaj Finserv offer end-to-end online business loans that provide a host of benefits to the borrowers.
Bajaj Finance Limited, the lending and investment arm of Bajaj Finserv group, is one of the most diversified NBFCs in the Indian market catering to more than 6 million customers across the country. Headquartered in Pune, the company’s product offering includes Consumer Durable Loans, Lifestyle Finance, Personal Loans, Loan against Property, Small Business Loans, Home loans, Credit Cards, Two-wheeler and Three-wheeler Loans, Construction Equipment Loans, Loan against Securities and Rural Finance which includes Gold Loans and Vehicle refinancing Loans. Bajaj Finance Limited prides itself for holding the highest credit rating of FAAA/Stable for any NBFC in the country today.