What Are Short-Term and Long-Term Loans?

What are short-term and long-term loans?

One of the biggest differences between short and long-term loans is given away in their names. But, both types of loan offer convenient ways to get money when you need it and can help to improve your credit score. Every time you successfully make a repayment and settle your loan, the lender marks your credit file to say you’ve done so, and future lenders can see that you’re reliable and creditworthy. 

Just remember, whichever type of loan you take out, missing your repayments can lead to missed payment fees and even default notices, which are a big red flag on your credit file that says you failed to meet your borrowing responsibilities.

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What is the difference between short-term and long-term loans?

Short-term loans are small loans designed for people who need quick access to emergency cash to bridge the gap between paydays. There is no long-term commitment made between the lender and the borrower – it’s just a quick, easy transaction that is intended to be paid back fast, usually around 3 months. If you make your repayments, the debt can be gone as quickly as it started.

Meanwhile, long-term loans are designed for borrowing large sums of money over long periods of time. When you take out a long-term loan, you commit to being in debt for a long time, and you may be asked to secure the deal with collateral, such as your home or car. Short-term loans rarely require collateral. Long-term loans are big deals that can be part of your life for many years.

Your questions, answered

There’s also a notable difference between the interest rates of short-term and long-term loans. Short-term loans tend to have much higher interest rates to counteract the shorter borrowing period, whereas long-term loans have much lower interest rates (for longer periods of time). You’ll also pay more interest on your long-term loan overall because of the extended borrowing period.

When it comes to the speed and ease of applying, short-term loans win. If you’re facing a financial emergency, there is no time to be waiting around for approval. Short-term loans take care of this as they are usually approved or declined straight away. If your application is approved, the funds can be sent straight into your bank account very quickly, sometimes within an hour of being approved. Long-term loans, on the other hand, usually have a longer, more formal application process. 

Short-term loans are quick solutions to emergencies. Sometimes life throws unexpected curveballs, and if you don’t have the money to resolve them, which can be extremely stressful and distressing. This is especially true if you don’t have savings to fall back on or friends and family who can’t help out.

Some of the reasons why people apply for short-term loans are to take their beloved pet to the vets, fix a broken boiler, repair a car after a crash or breakdown, or get emergency dental work done. If you are facing an emergency situation like this and know that you can afford to make the repayments of a short-term loan, then it is the right solution for you.

Not everyone is eligible to apply for a short-term loan; therefore, it’s worth double-checking that you are eligible before starting an application. The standard criteria are as follows, although some lenders might have additional criteria of their own.

  • Aged over 18.
  • A UK resident.
  • Employed, either by a business or self-employed.
  • A UK bank account holder.
  • Receive a regular income.

If you meet these criteria and need cash fast, a short-term loan can definitely help you out. Read on to find out how.

First, find a short-term loan company that best suits you. Look for a low APR, low daily interest rates and flexible terms, if possible. It’s important to compare lenders so that you find the right one for your personal circumstances.

You’ll need to fill in an application form, which you can do on the lender’s website. It will take 10-15 minutes to complete the form and submit it to the lender. It is usually a very quick, easy and hassle-free process. Your lender will want to know how much you’d like to borrow, potentially what the loan will be used for, and how long you’d like to borrow the money. You’ll need to confirm your employment information, details of your income and information about where you’ve lived for the last three years. Sometimes, you’ll also be asked for information about your monthly outgoings, such as your mortgage or rent, utility bills, other bills, transport and any common expenses. 

Make sure you thoroughly read the terms of the agreement, so you know what your obligations are, when your repayment dates are and how much you’ll need to repay. Once you’ve submitted your application, the lender will run a credit check and affordability assessment in the background. They can usually give you a decision straight away, although there are some occasions where they might need to speak to you for further supporting information.

Once your loan has been approved, your lender will transfer the funds directly into your bank account. This is a quick process, with some lenders depositing the money within an hour of approving the loan. A short-term loan is perfect for anyone facing a financial emergency that needs resolving fast.

One of the perks of short-term loans, compared to long-term loans, is that you pay them off very quickly. Lenders make this process really easy by using a continuous payment authority (CPA) which automatically collects your repayments on the agreed date straight from your bank account. You agree to the continuous payment authority during the application process. As long as you have sufficient funds in your account to make the repayment, you don’t need to do anything else to repay the loan. It’s an easy, stress-free part of the short-term loan experience.

Most lenders will also be happy to accept early repayment of your loan, in full, if your circumstances change and you no longer need it. This can differ between lenders, so check their specific terms for more information. Some lenders offer a 14-day cooling-off period after a loan has been taken out if you change your mind and want to return the funds, although the loan may still be subject to interest charges for the period of time you’ve had it.