Making Sense Of Short-Term And Long-Term Loan Plans

Short Term Loan Singapore

The world of loans can be a confusing one. Amongst all the ways loans can differ, there’s one aspect you need to think about: the length of the repayment plan. Often split into two types – short-term loans and long-term loans, loan repayment plan is a crucial consideration in your financial planning.

Here, we’ll explore some of these key differences between short-term and long-term loans.

Short-term loans

Loans with a repayment period of a few months to about a year are generally considered short-term loans. Generally, the corresponding amount borrowed is small.

Due to the smaller amount involved, short-term loans have a few advantages.

  • Easier approval: Moneylending institutions usually approve small loans more easily. Minimal documentation is needed, and there is often no need for stringent background checks.
  • Faster: Because the requirements are more lenient, it is easier to apply and have a short-term loan approved. Thus, short-term loans are ideal for urgent cash needs such as emergency medical bills.
  • Less interest: While interest rates for loans vary from institution to institution, you often pay less in interest with a short-term loan, as there is less time for it to accumulate.

However, there are limitations to short-term loans as well. Most obviously, the downside to it is the small loan amount. If you need a huge capital, short-term loans will not be suitable. Additionally, if you are comparing the same principle loan amount over a short-term and long-term repayment plan, the shorter repayment period will mean more hefty payments each time – this can be a good or bad thing, depending on your financial situation.

Long-term loans

Loans with a repayment period of over a year to a few years are considered long-term loans. With these loans, the amount is usually large, and are used for big-ticket spending like on a car, home, education, or business.

Due to the substantial loan amount, long-term loans are higher in risk, have higher interest rates, and usually are more tedious to apply for and get approval on. However, in some cases, they are quite necessary, and can be a wise choice.

One significant aspect of long-term loans are the smaller repayment amounts each month. There are some situations where this is favourable for the borrower, such as:

  • Financial constraints: Smaller repayment amounts each month are more manageable. This keeps your debt-to-income ratio in a manageable range so that you have enough cash for daily necessities and emergency buffer.
  • Unstable cash flow: For cases like education or business loans, you might be uncertain of your salary or earnings. Long-term loans offer flexibility where you can pay small amounts each time until your income is more stabilised.

Which loan should I choose?

The right repayment plan ultimately depends on your needs and ability. Both plans have their pros and cons, and are suitable for different situations.

For example, if you are faced with an urgent cash need such as a one-off purchase, medical emergency, or relatively small business spending, a short-term loan is often the wiser choice, as it puts less of a burden on your finances and mind. Short-term loans are also faster and quicker, ensuring you get the cash you need in time.

On the other hand, if you are looking to fund things like a new business venture, business expansion, or new home, a long-term loan is usually better. This puts less strain on your monthly debts and offers you a more flexible repayment plan.

As with taking out any loan, it is crucial to do so with careful consideration. Only with the right choices can you minimise the dangers of falling into deep debt, and make the loans work for you instead.

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