What is a short-term loan?
A short-term loan is a type of borrowing designed to be repaid within a relatively brief period, within a year at most but usually in a much shorter period. There are two main types of short-term loans. The first is the payday loan, which is typically due to be repaid by your next payday.
This could be in a week, a month, or even a quarter, depending on when you receive your income. Payday loans are often used for smaller sums of money and must be repaid in full in one go, something to keep in mind when looking at the interest rate on this kind of short-term loan.
The second type of short-term loan is offered by banks, online lenders, and credit unions. These loans also have short repayment terms but may offer more flexibility than payday loans, such as the option to repay over several months rather than all at once.
However, these loans are often dependant on your credit score. If your credit score is lower, you may find that your options are more limited, and the interest rates offered could be higher.
What are short-term loans used for?
Short-term loans are commonly used for immediate repairs, such as fixing a car or a broken boiler. For example, if your car breaks down and you need £500 for repairs, you could take out a short-term loan and repay it in instalments, like £25 per week.
Similarly, if you need £200 to fix your boiler but won’t have the money until your next payday, a loan could cover the cost in the meantime, though you’ll need to factor in any added interest when repaying the loan.
Pros and cons of short-term loans
| Advantages | Disadvantages |
| Access to quick funds: Short-term loans allow you to get the money you need rapidly, which is ideal for emergencies. | Higher interest rates: These loans usually come with higher interest rates and extra fees than long-term options, so research thoroughly before applying. |
| Short commitment: You won’t be tied into a loan for years, reducing the risk if your financial circumstances change. | Lower borrowing limits: Short-term loans generally offer smaller amounts, so they might not be suitable for larger financial needs. |
| Multiple options available: With many lenders offering short-term loans, you can shop around for the best deal. Use an eligibility checker to avoid impacting your credit score. | One-time repayment for payday loans: Payday loans must be repaid in full within one pay period, which could leave you short on funds and tempt you to borrow again. |
What is a long-term loan?
Most people think of long-term loans when they consider taking out a loan. These loans typically have repayment periods longer than a year and are more accessible to those with a decent credit score and a regular income. They allow borrowers to access larger sums of money, which can be used for more substantial purchases or investments.
These loans are offered by a variety of lenders, including banks, building societies, and online platforms. Because they are spread over a longer period, they often come with lower interest rates than short-term loans.
However, they require a more significant commitment, as you’ll be repaying the loan for several years, and lenders will typically require a strong credit profile to offer the best rates.
What are long-term loans used for?
Long-term loans are typically utilised for larger financial needs, such as purchasing a car, renovating a home, or consolidating debt. Here are some common uses:
Personal loans are a popular choice for those with a strong credit history. These loans often come with flexible terms and repayment conditions, provided you meet the lender’s criteria. Many institutions offer personal loans, from traditional banks to supermarkets, catering to various credit profiles.
For homeowners, secured loans, such as mortgages, are an option. By securing the loan against your property, you may be able to borrow a more considerable sum over several decades at a lower interest rate than an unsecured loan. However, the risk is significant: if you fail to keep up with repayments, you could lose your property.
Pros and cons of long-term loans
| Pros | Cons |
| Larger borrowing amounts: Long-term loans allow you to borrow more, which is ideal for bigger purchases or investments. | Extra fees: Long-term loans may come with additional charges, so ensure you’re aware of these before applying. |
| Lower interest rates: Interest rates are generally lower compared to short-term loans due to the larger amounts and longer repayment periods. | Long-term commitment: You’ll be tied to repayments for a longer period, which could be problematic if your financial situation changes. |
| Variety of lenders: Like short-term loans, long-term loans are offered by a wide range of financial institutions, giving you plenty of options to find the best deal. | Higher total repayment: If you struggle with repayments and extend the loan, you could end up paying back far more than you originally borrowed. |
Which kind of loan is right for me?
Choosing between a short-term and long-term loan depends on your specific financial needs and circumstances. For example, if you need to borrow a small amount, say £1,000 or less, and you’re confident you can repay it within a year, a short-term loan might be the right choice. This could be particularly suitable if you have a limited credit history or need the funds quickly for an emergency.
On the other hand, if you require a larger sum, a long-term loan could be more appropriate. For instance, if you’re planning a major home renovation or need to consolidate multiple debts, borrowing a more significant amount over several years may make more sense. Additionally, if you have a good credit score, you might qualify for lower interest rates on a long-term loan, making it a more cost-effective option.
Ultimately, the right choice depends on what you can afford to repay and your financial situation. It’s essential to carefully consider both the amount you need to borrow and how long you’ll need to repay it.
Understanding the differences between short-term and long-term loans is essential for making the best financial decisions. While short-term loans offer quick access to smaller amounts of cash, they often come with higher interest rates and a shorter repayment period. Long-term loans, however, allow you to borrow more substantial sums at lower interest rates but require a longer commitment.
Whichever option you choose, it’s vital to assess your financial situation, consider your ability to repay the loan and explore all your options before deciding. With the right approach, you can find a loan that meets your needs and helps you manage your finances effectively.
