Did you know that 54% of the Gen Z population has taken out a loan? That’s over half of the population! 

So clearly, it is quite common to take out a loan. Now that we’ve set that straight, it’s time to learn more about when to take out a short-term loan versus a long-term loan. What’s the difference between them, and why is it important to know?

In this guide, we’ll walk you through everything you need to know about loan payments and payment terms as well.

What Are the Types of Loans?

There are so many different types of loans out there that you can choose from, but each one has a different purpose. Here are some of the most popular types of loans:

  • Car loan
  • Student loan 
  • Personal loan 
  • Mortgage loans
  • Home equity loans
  • Debt consolidation loans
  • Small business loans

And there are so many more as well.

It’s important to know what type of loan you want because each one is meant for something different. For instance, a car loan is specifically to apply to a car payment, while a student loan is specifically to apply toward school tuition.

When it comes to the different types of loans, these loans can all be taken out for a different amount of time. For a car loan, you may only need a short-term loan, while for your mortgage, you may want a long-term loan. But what’s the difference?

Short-Term Loans

A short-term loan is typically a loan that is only borrowed for a year or less. Many times, these loans are even less than a year or even only a few months! However, the year-long term is typically the most offered.

Most of the time, short-term loans are taken out when someone just needs quick cash to meet certain expenses over a short period of time. For instance, you may need a home repair but cannot afford it at the moment, or you have a car repair that you need and cannot afford that either. Either way, a short-term loan can give you the cash advance to be able to pay for it.

Short-term loans tend to have higher interest rates because they are paid over a shorter period of time. It’s important to understand those interest rates to know if you can afford to pay the loan back in the agreed amount of time. If you cannot, you will find yourself in a worse position. 

Pros of Short-Term Loans

When thinking about getting a short-term loan, there are a few benefits of getting these. The benefits are that:

  • You can access cash quickly
  • There are a lot of borrowing options
  • You are not repaying for multiple years 

These are quick cash options that you only have to worry about for a few months, so the loan won’t be looming over your head.

Cons of Short-Term Loans

While there are advantages to this type of loan, there are also disadvantages. When you take out a short-term loan, you need to be aware of the following:

  • Short-term loans charge higher interest rates than standard loans
  • There may be extra fees 
  • There is a limit to the amount you can borrow
  • They can potentially lead to further debt problems 

If you are aware of the disadvantages of the short-term loans, this will improve your overall experience when choosing to go this route.



Alternatives to Short-Term Loans

If you do not want to actually take out a loan, there are a few ways around one to get fast cash.

You can try to ask your family or friends for some cash and then pay them back over time as well. Or, you can charge the fee to your credit card as long as you will have the money by the next pay cycle (this usually gives you about a month to a month and a half).

Long-Term Loans

Long-term loans are ones that you probably think of when you think about taking out a loan. These are your typical personal loans or mortgages for a home. This is where a car loan would also fall under.

To get a long-term loan, you need a decent credit history, proof of stable income, and proof that you can afford the repayments of the loan.

These loans typically take a few years or more to pay back and are usually paid back in monthly payment installments. 

The good news about long-term loans is that the interest rates are much lower than short-term loans, so you won’t have to worry about paying so much in addition to the money you already owe back to the lender. However, it is important to know what interest rates you are working with, as it will differ based on the lender.

Pros of Long-Term Loans

There are a lot of advantages to going with a long-term loan versus a shorter one. 

For one, you can borrow more money. If you need more cash or more money for something (like a house or a car), you have the option to borrow more from a long-term loan. If you went with a short-term loan, you would not get as much money. 

In addition to being able to borrow more money, you will also be able to get a long-term loan much easier even if you don’t have the best credit history. This makes it easier to get one to suit your needs.

And, of course, as mentioned before, interest rates are lower with long-term loans.

Cons of Long-Term Loans 

While there are a lot of great things about long-term loans, there are also a few disadvantages.

One disadvantage is that you are committed to the debt of the loan for a much longer period of time than you would be for a short-term loan. Not only that, but extending the amount of time you have to repay will also increase the amount of money you have to pay over time. In reality, the longer you spread it out, the more interest you are paying (even if it is low).

Just like short-term loans, these loans may also carry fees with them, so it is important to check.

Common Long-Term Loans

There are a few long-term loans that are more popular than the rest.

A personal loan is one of the most popular that is available to people with strong credit reports. That is because they have flexible loan terms and repayment options.

A secured loan or a mortgage loan is one that you typically would use to borrow a much larger amount of money. This typically is spread out over a few decades rather than even a few years. These also come at much lower interest rates as well. 

What to Know Before Getting a Loan

Before you get a loan, the lender will most likely carry out a credit check to better understand your credit history. Depending on that history, you may have a lot of options for loans (usually if you have great credit), or you might have slimmer pickings if you do not have the best credit history.

Sometimes it is smart to get your free credit history before applying so you can better understand your options. 

You should also ensure that you read all of the fine print before taking it out so you understand more about what happens with a default on a loan, violations like tax evasion, or loan fraud. All of these have severe legal repercussions, so it is best to understand what this is before getting the loan.

Here are a few other tips when getting a loan:

  • Look around so that you get the best interest rate for your loan
  • Make sure you know the exact type of loan you need (not just short versus long-term)
  • If you have a financial advisor, talk to them before you get a loan

Short-Term Loan Versus Long-Term Loan

If you are one of the many people in the U.S. that needs a loan at some point in your life, you now know what types of loans there are. You know the differences between a short-term loan and a long-term loan, as well as the benefits and disadvantages of each.

If you are looking for a car loan, we can help you with C1 Car Loans. We want to give you an affordable loan option, and don’t want past issues to affect you. So if you are ready to go, you can apply here.