Whether to go for a short or long-term personal loan depends on a lot of factors like your financial needs and situation. While the interest paid will be less on a short-term loan, the EMI will be lower on a long-term loan. Here are some facts to consider before you decide on a short-term or a long-term loan.

Factors to Consider before you take a Short-term or Long-term Personal Loan

  1. Loan amount - If you need to borrow a smaller amount of money, a short-term loan may be a better option. Long-term loans are typically for larger amounts. Long-term loans also increase your total interest payment. 
  2. Interest rates - Generally, long-term loans have lower interest rates than short-term loans. However, this can vary based on your credit score and other factors, so it's important to compare rates for both types of loans.
  3. Repayment period - Short-term loans typically have a repayment period of a few months to a year, while long-term loans can extend up to several years. If you need more time to repay the loan, a long-term loan may be a better fit.
  4. Fees and penalties - Check for any additional fees or penalties associated with the loan, such as prepayment penalties, late fees, or origination fees. Some short-term loans may have higher fees or penalties than long-term loans.
  5. Credit score - Your credit score may impact your ability to qualify for a long-term loan with a lower interest rate. If you have a lower credit score, a short-term loan may be a better option.
  6. Expected bonuses or increments – If you are expecting a bonus or salary increment soon, you can go for a short-term loan as you will be able to pay the loan with the bonus or increment. Short-term loans have lesser interest outflow and hence you can save money.
  7. Debt-to-income ratio – To manage the outflow of money, your debt-to-income ratio should be low. Short-term loans are cheaper but can affect the debt-to-income ratio as the monthly outflow is high.
  8. Future Plans - Choosing a short or long-term loan is also dependent on your plans. Evaluate if you will need another loan shortly. Or will you be able to manage the EMI along with other expenses? These questions will give you a good insight into how much EMI you can manage.

Key Characteristics of a Short Term Personal Loan

  1. Duration - Short-term personal loans are generally offered for a period of up to 24 months.
  2. Interest rates - The interest rates for short-term loans in India are usually higher than those for long-term loans due to the higher risk involved
  3. Collateral - Many short-term loans in India require collateral such as property, stocks, or gold, which acts as security for the lender.
  4. Loan amount - The loan amount for a short-term loan in India is usually smaller than that for a long-term loan, typically ranging from a few thousand to several lakhs.
  5. Quick processing - Short-term loans in India are processed quickly, with some lenders offering instant approval and disbursement of funds.
  6. Repayment - Short-term loans in India usually require the borrower to make regular payments, either monthly or quarterly, until the loan is fully repaid.
  7. Purpose - Short-term loans in India are often used for emergency expenses, working capital needs, or to finance a specific project or purchase.

Key Characteristics of a Long-Term Loan

  1. Duration – Long-term loans are generally offered for a period of more than 12 months, up to 20 or 30 years.
  2. Interest rates - The interest rates for long-term loans in India are usually lower than those for short-term loans due to the lower risk involved.
  3. Collateral - Many long-term loans in India require collateral such as property, stocks, or gold, which acts as security for the lender.
  4. Loan amount - The loan amount for a long-term loan in India is usually larger than that for a short-term loan, typically ranging from several lakhs to crores.
  5. Repayment - Long-term loans in India usually offer flexible repayment options, with the borrower being able to choose the repayment tenure and installment amount that suits their financial situation.
  6. Purpose – Long-term loans in India are often used for large purchases such as buying a house, or a car, or for funding a business venture.
  7. Credit score - Long-term loans in India typically require a good credit score, as the lender will assess the borrower's creditworthiness and ability to repay the loan over a long period.

Conclusion

The decision to choose a short-term or a long-term loan depends on a lot of factors. Your financial condition and needs are major decision-makers. The loan amount, interest rates, repayment terms, credit score, plans, expected bonus, and increment in income are some of the crucial factors. Evaluate everything and decide accordingly.

FAQ of Short vs Long term personal loans how to choose the right one

1:What is the main difference between short-term and long-term personal loans?

The main difference is the duration of the loan. Short-term loans are generally for a period of up to 24 months, while long-term loans can be for several years or even decades.

2:Which one has a higher interest rate?

Generally, short-term loans have higher interest rates than long-term loans because of the higher risk involved.

3:What is the repayment period for a short-term loan?

The repayment period for a short-term loan is usually less than 2 years, with the borrower required to make regular payments until the loan is fully repaid.

4:Can I get a short-term loan without collateral?

It depends on the lender. Some short-term loans may be available without collateral, but the interest rates may be higher.

5:What is the loan amount for a long-term loan?

The loan amount for a long-term loan is usually larger than that for a short-term loan, typically ranging from several lakhs to crores.

6:Can I prepay a long-term loan?

Yes, most lenders allow borrowers to prepay a long-term loan without any penalty.

7:What is the purpose of a short-term loan?

Short-term loans are often used for emergency expenses, working capital needs, or to finance a specific project or purchase.

8:What is the purpose of a long-term loan?

 Long-term loans are often used for large purchases such as buying a house, or a car, or for funding a business venture.

9:Which one is better - a short-term or long-term loan?

It depends on your financial situation and borrowing needs. Short-term loans may be better for emergency expenses or working capital needs, while long-term loans may be better for large purchases or long-term investments.

10:How can I choose between a short-term and a long-term loan?

Consider your financial situation, the purpose of the loan, and the interest rates and terms offered by lenders. Compare the costs and benefits of each option before making a decision.