Pros and Cons of Short-Term Loans vs. Long-Term Loans

You never know what life decides for you the next day. So, you always need to be financially prepared. Sometimes, your emergency fund may not be enough to cover the uncertain financial expenses. So, do you doubt whether to choose a short-term or long-term loan? Refer to the information mentioned below. Welcome to this post, where you will understand the difference between long-term and short-term emergency loans.

An Introduction to Short-Term Loan – Pros and Cons

Short-term loans are the perfect saviour during unexpected medical bills or urgent car repairs. A short term loan last up to one year. This type of loan is ideal to bridge temporary financial gaps.

Such a loan is a safe choice as it involves negligible risk because of the limited amount sanctioned. The following are the pros of short-term loans:

• An Easy Loan Approval Process

The time required for the lender to approve your short-term loan is speedy and requires minimal documentation. Short-term loans sanctioned by FinTech and NBFC ensure a quicker application. Since the loan amount is small, requirements for credit score may be stringent in a few cases.

• No Need to Worry about Bad Credit Scores

You can opt for a short-term personal loan even with a poor credit history. Some people also refer to it as a low CIBIL score loan that focuses on your current financial scenario instead of previous credit mistakes.

• Excellent for Emergency Purposes

At certain times in life, urgent requirements for cash may take a toll on your financial life. With a short-term loan, you can overcome the scenario, regardless of whether it’s an unexpected bill or home repair.

• Cost-Effective Monthly Instalments

You can repay short-term loans within a flexible period. Since the repayment period is shorter, borrowers can clear their debt easily.

• Improve Credit Score

Loans with shorter terms help you build your credit score excellently. Ones who pay the amount promptly can build up their credit score for future borrowing. Note that your credit score only increases if you pay EMIs on time.

Cons of Short-Term Loans

Short-term loans come with certain downsides. The following are the drawbacks:

• A Higher Rate of Interest

A few short-term loans have higher interest rates. So, while selecting this type of NBFC loan, please discuss it with the lender beforehand.

• Early Repayment Penalty

It comes with early repayment penalties and other fees for repayment failure. Evidently, someone can pay the whole loan amount before the due date. However, they need to pay an additional charge to the lender.

• Limited Availability and Use

Short-term loans are not suitable if you have demanding financial goals. They are best for temporary and immediate needs.

Long-Term Loans – Advantages and Disadvantages

You can apply for a long-term loan for business purposes or home purchases (car loans or educational purposes). The following are the pros and cons of long-term loans:

Pros of Long-Term Loans

The following are the advantages of availing long-term loans:

• Builds Your Credit Score

A few loans come within a range of ten to twenty years (or more). Paying all the monthly instalments without fail establishes an incredible credit history. So you can qualify for better loan terms in the future.

• Excellent Tax Benefits

A few long-term loans come with tax benefits. For instance, a home loan can claim tax deductions under Section 80C of the Income Tax Act.

• Benefits for Businesses

Do you wish to initiate a business? If so, you may opt for the loan with a repayment tenure of five years or more. The loan may let you borrow money for longer. You can use the loan to upgrade your office space or buy land. Some companies use the loan to hire staff and expand business accordingly.

• Saves Money in the Long Run

Another benefit of long-term loans is that you can borrow a higher amount for longer. It reduces your money in the long run.

• Mitigates Risks of Debt Traps

Compared to short-term loans, you can fund your immediate needs with these loans. You only need to take recourse to risky funding options such as credit cards. Since long-term loans also come with longer tenure and lower interest rates, they are perfect for borrowers in the long run.

Cons of Long-Term Loans

Here’s a list of disadvantages of long-term loans

• Approval Time is Longer

The long-term loan application process that involves collaterals like property or assets can be time-consuming. The strict verification procedures make these loans lengthy.

• Need for a Collateral

Lenders offering long-term loans at low interest rates and elongated repayment tenure usually ask for collateral. Note that long-term loans are secured. So, lenders must back up their loans with the borrower’s assets (such as real estate and more).

• Penalty for Prepayment

Some lenders may charge you high prepayment penalties. So, you may incur a charge if you wish to pay the entire amount before the tenure.

• Stringent Eligibility Requirements

Choosing a long-term loan is associated with a strict eligibility requirement. The lender may check your credit score besides other parameters.

Outlining Short-Term Loans vs Long-Term Loans – Distinguishing Parameters

Here, you can understand the differences between long-term and short-term instant personal loan online:

Finally

So, you have learned what short and long-term loans are and their pros and cons. You can now select a loan that suits your needs accordingly.