Should I Choose a Long-Term or a Short-Term Tenure
A loan is used for various reasons, like building a new house, spending on a wedding, medical purposes, education, or purchasing a flat or apartment. Eligibility is generally fixed by repayment capacity and property price. While most loans are granted for a maximum of 30 years, it has been seen that the average time it takes people to pay off their mortgage fully is around 8 years. You agree to pay an EMI (equivalent monthly instalment) when you obtain a home loan. An EMI of 60–65% of monthly income for a specified period can last up to 30 years. The lower the interest rate, the longer the term.
What are short-term and long-term loans?
Short-term loans are repayable in less than a year, whereas long-term loans have a longer repayment period, depending on the type of loan. We will further discuss it in detail below.
Short-term loans
- Short-term loans are repayable in less than a year. They are right for small, short-term capital needs. These are unsecured loans with no asset requirements. There is very little paperwork required. You can get a short-term, instant personal loan online.
- Short-term investments are those that are traded for a short period of time, usually up to three years. These are high-liquidity instruments with lower market risks. Short-term financing gives borrowers a single amount of money that they can use to solve a short-term problem.
- Short-term financing provides borrowers with cash quickly, making it an excellent choice for those who require funds right away. It also takes less time to repay than traditional loans.
It’s also useful for people who don’t qualify for a bank’s line of credit or whose bad credit makes getting a credit card difficult.
Key features of a short-term loan
Interest Rate
The main impact of loan tenure is the amount of interest that must be paid. The interest rate rises as the repayment period lengthens. Also, the interest cost remains low if the repayment period is short. After all, the cost is fixed by the applicable interest rate.
Property Mortgage
A loan is a secured loan. The property will be mortgaged until the entire loan amount is repaid. The shorter the tenure, the shorter the property’s mortgage with the bank.
Amount of EMI
Loans must be repaid in instalments. Borrowers should select an EMI option that is comfortable for them. Prepare to pay a very high EMI for a short-term loan. On the contrary, be prepared to pay a low EMI for long-term loans. If the EMI amount is manageable, a short-term loan should be considered.
Long-term loans
- Long-term tenure has a longer repayment period, depending on the type of loan. These loans are typically used to borrow large sums of money.
- While interest rates on long-term tenure loans are generally lower than on short-term loans, the total interest paid on the borrowed amount is much higher.
- Home loans, car loans, large personal loans, loans for long-term hospitalisation expenses, and so on fall into this category.
Key features of long-term loans
Greater loan amounts
Long-term tenure loans have higher loan amounts. As a result, home loans, auto loans, and other long-term tenure loans provide larger loan amounts than short-term loans such as personal loans. Because these loans are mostly secured through the submission of collateral, banks are not afraid to lend large sums to long-term loan applicants.
Interest rates are lower.
Long-term loans have lower interest rates because the loan repayment period is longer. As a result, car and home loans have lower interest rates than personal loans.
Submitting Collateral
Long-term tenure loans almost always require collateral because the loan amount is much larger than other loans. This assists banks in recouping lost funds if a borrower fails to repay the loan.
Instalment repayment
Long-term loans are repaid in equal monthly instalments over a long period. These monthly payments consist of two components: principal and interest.
Conclusion
Like any other choice, both have advantages and disadvantages. Short-term investing allows you to achieve your financial goals in a short period of time while taking on less risk. Long-term investments, on the other hand, are appropriate if you have a higher risk tolerance and desire higher returns.
For more such finance-related inquiries, contact Piramal Finance. https://www.piramalfinance.com/
FAQs
- Which of the following is a benefit of using short-term financing?
The main advantage of a short-term loan is that you will usually receive funds within a week of approval. If you need to make a quick payment on a bill or buy new stock, a short-term loan will help you meet your cash needs right away.
- What are the drawbacks of a long-term loan?
A significant disadvantage of a long-term loan is that it impacts your monthly cash flow. The larger your loan, the more you’ll have to pay monthly.
- What are the reasons for the difficulty in obtaining long-term loans?
Long-term tenure loan approval is also generally more difficult. The lender will want to ensure that the money is being lent to someone who can repay it. Many long-term loans have higher interest rates than short-term loans. This makes the lender’s decision to lend you money riskier.
- What is a loan term?
A loan term is the length of the loan or the time it takes to pay off a loan completely when the borrower makes regularly scheduled payments. These loans can be short-term or long-term, and the time it takes to pay off the loan’s debt is referred to as the loan’s term.