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HOW SHORT TERM LOANS ARE DIFFERENT FROM LONG TERM LOANS?


Today, loans are the essential financial tools that can bridge the gap between your current financial capacity and future goals. Your financial goals will not be same at a time and can be planned according to the available funds, urgency and level of importance. Therefore, financial instruments can help you to fund your goals and you can "Apply For Loan" with different repayment periods as well as interest to get specific outcomes.

Loans can be categorized in two classes; short term loans and long term loans based upon repayment tenure and other aspects. In this article, we will compare the short term borrowing and long term loans in detail:

  • Need for security: Loans with long repayment period involve higher amounts that you have to pay over a longer period; therefore lender requires collateral in exchange for the funds. In case, the borrower defaults on loan repayments due to any reason, lender can liquidate the collateral to recover the outstanding amount. On contrary, short term loans are mostly unsecured and involves small loan quantum that are required to be repaid over a short period.
  • Interest rate and tenure: The cost of loan and the tenure are inversely proportional to each other which means they always go in opposite direction. If the tenure is short, the interest rates offered on the loan are comparatively higher and vice versa. To be more precise, short term loans usually charge a high rate of interest as compared to long term borrowing.
  • Eligibility criteria: Short term loans are always considered secured by lenders and are processed with minimal documentation as in form of income and identity proof whereas lenders find long term loans as more risky and needed to be convinced with the repayment capability of the borrower. Every lender has different set of eligibility criteria but largely a borrower will be required to submit income proof, IT return slips, latest bank statements and collateral for loan.
  • Time period: The repayment period for short term borrowing is generally within the range of 3-4 years whereas the duration for repaying a long term loans can go anywhere in the range from 10-20 years depending upon the borrower’s age and income type of loan, purpose of the amount and your repayment capability.
  • Approval speed: Loans availed for short term can be approved and disbursed to you even within a single day asking nominal documentation whereas, the approval speed for long term loans take time as it involves stringent background checks as well as demand thorough review of documents. Once the lender is confident about borrower’s credibility, the loan will be disbursed quickly whether you "Apply For Loan Online" or offline.

Hence, long term loans and short term loans have their own pros and cons. When a borrower decides to avail a loan, he/she must weigh the benefits and flaws and decide which loan tenure will be effective depending upon the need, purpose and ability to repay the loan money. It is good to take a deep dive in the features of these two kinds of loans.


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