What are short-term loans?
Short-term loans are basically loans that are offered to an individual for a short tenure that usually ranges from 15 days to a year. These are advantageous for customers who are unable to get loans for a longer tenure from a bank or lender. Short term loans are generally unsecured, meaning that you do not have to provide any money or property as security to avail the loan amount. Short-term loans are also known as short-term instalments or short-term finance.
What are long-term loans?
Long-term loans are basically loans that are offered to an individual for a longer tenure that usually ranges from 3 years to 30 years or longer. These types of loans are given only if the individual provides proof of regular monthly income and can prove the continuity of their job. Long-term loans generally offer pre-payment options to their clients who want to close their loan sooner than the tenure chosen. Also, some long-term loans are secured loans, wherein one needs to offer an asset as security.
Why are short-term loans cheaper than long-term loans?
1. Total interest paid:
When an individual opts for a short-term loan, the outflow of money towards the paying of total interest is much lower in comparison to a long-term loan. This makes a short-term loan much cheaper than a long-term loan. In a long-term loan, though the interest rates seem lower, but one will still be paying more interest as the duration of paying the loan is much longer. So, the total interest paid in a short-term loan is much lower than in the case of a long-term loan.
2. Duration of repayment:
Since a long-term loan is a long-term financial burden to carry, it can restrict your monthly cash for a long period of time, thereby hindering other expenses to be paid. Short-term loans are easier to get approved and can be repaid very fast, thereby ridding the individual of the financial burden sooner.
3. Loan amount:
Long-term loans are generally taken for a much larger loan amount than a short-term loan. So, the interest is calculated keeping in mind the loan amount and so the outflow of cash towards repaying the principal amount along with the interest is much higher in the case of a long-term loan than in the case of a short-term loan.
Though short-term loans work out to be cheaper, long-term loans can fund big expenses that cannot be paid by an individual in one shot from their pocket. They come in handy when one wants to buy a new home, a luxury car or anything in the big leagues. Long-term loans can also be pre-closed if the customer wants, thereby reducing the tenure of the loan.
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