Short Term Loan vs Long Term Loan – The key difference between short term loan and long term loan is with respect to loan tenure during which the amount is to be repaid by the borrower. The loan is sanctioned by commercial banks for different tenures – short, medium and long term depending upon the purpose and type of loan.
There are different type of loans categorised into – short term loan and long term loan.
What is Short Term Loan ?
A loan that is sanctioned by commercial bank or financial institution for a period up to 12 months, is known as Short Term Loan. Short Term Loans are generally sanctioned by banks to meet short term financial needs of the borrower. These types of loans are useful for borrowers who are not able to avail loan for longer tenure. Interest on such type of loan is generally higher than a long term loan.
Short term loans are granted to individuals and businesses by commercial banks or financial institutions to meet their short term and working capital needs. Working capital needs refer to credit needs of a business for purposes like purchase of raw material, labor cost, bill payments, taxes, miscellaneous expenses etc. These loans are to be repaid in regular instalments within a short period not exceeding 12 months. The loan can be secured to unsecured depending upon the lender.
Short Term Loan Features
Features of a Short Term Loan may vary from one lender to another. However, some common features of short term loan are as below :
- Short Tenure or Period
- Available for Individual or Businesses
- Limited Paperwork
- Quick Approval
- Secured or Unsecured (depends on the lender)
- Bad Credit acceptable (depends on lender)
There are financial institutions that offer loan if credit history is poor. However, they may charge high interest rate to cover the risk involved in such loan.
What is Long Term Loan ?
A loan that is sanctioned by commercial bank or financial institution for extended duration or period exceeding 12 months is known as Long Term Loan. The term or period in case of long term loan may vary from 1 to 20 years or up to 30 years. Some of example of long term loans are – Car Loan, Home Loan, Personal Loan, Education Loan etc.
Also Read : What is Prime Security and Collateral Security ?
Loans are generally granted to businesses for repair /renovation of existing units, expansion, purchase of home, car etc. As loan is granted for longer duration, collaterals are obtained for recovery in case of default in repayment by borrower.
Long term loans are granted on the basis of regular income of the borrower and they offer prepayment option to people who want to pay off their loan before the maturity.
Features of Long Term Loan
Features of long term loan also vary depending upon the purpose for which the borrower has applied for the loan. However, common features of long term loan are as follow :
- High Loan Amount (depends upon credit history and income)
- Tax Benefits under IT Act (depends on type of loan) (Example – Home loan offer tax exemption)
- Low Interest Rate (as compared to short term loan)
- Require Collateral for security
- Repayment in regular equated installments spread over tenure of loan.
- Require Good Credit Score (good credit score offer better interest rates)
Difference between Short Term Loan and Long Term Loan
Short Term Loan
Long Term Loan
|Loan is sanctioned for short period not exceeding 12 months.||In case of long term loan, duration of loan may exceed above 12 months, upto 30 years.|
|Easier to qualify as they are less risky for lender due to short tenure.||Not easy as they are more risky as loan amount is big to be paid in longer duration.|
|Low credit score acceptable||Low credit score may lead to rejection of loan application.|
|In short term loan, interest rates are higher as compared to long term.||Low interest rate|
|Loan amount is small.||High loan amount|
|Limited paper work||Comprehensive paper work|
|Purpose of loan may be in case minor repair of car, home, unexpetced bill payments etc.||Purpose of long term loan may be for purchase of car, home, start a business, renovation, purchase of immovable assets etc.|