Short Term Loans Vs Long Term Loans: 5 Main The Differences
Are you looking for a personal loan to help you finance your next big purchase? Before deciding on a loan, it is critical to do some research, particularly on the types of loans available.
One of the biggest concerns of buying your dream home is financing. Firstly, kudos to your commitment to purchasing a home. But, it may require you to take a loan for owning a property as big as a home, after having a part of the working capital for a downpayment. Benefits like tax rebates are add-ons to home loans. However, you might still have difficulty in short-term loans Vs long-term loans and deciding which one is better for you.
To start from scratch, there are two types of loans that are offered by the lenders, long-term and short-term home loans. Deciding on a home loan is a checkpoint as there are a lot of factors to consider before you kickstart your loan procedures.
Long Term Loan Vs Short Term Loan: Which is better?
- Tenure of Home Loan
Long-term loans are offered for a tenure of more than five years and up to thirty years. Short-term loans are offered for up to five years only.
If you are planning to buy a home at an early stage of your career, you can always go for long-term loans. You would then have a great time in your hand for your home loan recovery.
Age is just a number! If you believe so and are ready to purchase a dream home at a later stage of your career, you can go for short-term loans as home loans are given up to retirement only.
Your job also has a role to play in choosing the tenure of home loans. If you have a secured career, you can go for a long-term loan. The stable income ensures that the EMIs are paid without any hiccups. If you have a business-oriented income, short-term loans are your hope for making hay while the sun shines.
- Interest Rates and Interest Cost
One of the critical factors is Short term vs Long term loan interest rates. Interest rates for the longer term are high when compared to short-term loans.
The shorter duration attracts lower interest rates. The risk of the loan repayment increases with time leading to higher interest rates on long-term loans.
Further, there are two types of interest: fixed interest rates and floating interest rates.
As the name suggests, the fixed interest rate remains static throughout the tenure, i.e., you will have to pay a fixed interest rate on a loan borrowed. If you think the market cannot dwindle to a certain point, then you can help yourself by improving your interest rate there. Hence, fixed interests are for you if the market is low.
On the other hand, floating interest rates swing with the market trends proportionally. It may rise or go down with the market trends. The floating interest rate is always less than the fixed interest rate. This creates an advantage as there is room for catching up with the fixed rates occasionally.
A home loan at floating interest rates is beneficial if you buy a home early in your career. You may see the market falls a few times, which reduces your rate. If you are well versed with the market trends and predictions, then you may choose the floating rate. If you are in the late forties, a fixed interest rate may be a feasible option.
But, before making a choice, you will have to consider a few other factors like EMIs and interest costs.
Interest cost is the cumulative interest amount that you pay on your home loan, during the entire tenure. The principle and interest together make an installment that you pay every month. The interest amount of all the installments adds up to make the interest cost at the end of the tenure.
The total interest, i.e., interest costs paid on the long-term loan is high, owing to the higher interest rates. So, prepare yourselves for pouring in your hard-earned money if you are getting into long-term home loans.
At this point, the home loan interest rates are at a 15 year low. Several lenders have reduced the grades as the festive offers boost the demand. Grab such opportunities to reduce your expenditure.
Home loans are paid off in installments called Equated Monthly Installments. You have to work on your capacity for repayment before considering the home loan option. Find the equilibrium where you do not load yourself with the more significant installments.
Short-term loans have higher EMIs than their counterparts for the same principle. Short-term loans increase the amount of each installment to cover the loan in a shorter duration.
You can choose the term of the loan after working on the EMIs that you can pay comfortably.
It is one of the eligibility criteria for considering a home loan. Your income bracket lets you decide on the term of the loan. As EMIs vary for different types of loans, you will have to take into account your income for calculating the EMIs.
Also, if you have a stable income with a secured job, a long-term loan is always preferable. A short-term loan comes to your rescue if you are not into a guaranteed job.
Your net income determines the maximum loan that you would be eligible for. Generally, lenders give a full loan of 60 times your net income. If you have a salaried income, then your net salary decides the maximum loan that you can entitle to. Your annual profit will be considered for loan eligibility if you are self-employed.
- Mortgage of Property
A home mortgage is a loan given by the lender, generally a bank to the borrower on a condition that the title of the property shall be transferred only after the full repayment of the loan. Putting in a line, the stuff you purchase acts as collateral to the loan.
For a long-term loan, you will not be entitled to the ownership of the property for a long time as the tenure of the loan is high. A short-term loan lets you enjoy the owner’s rights as soon as possible. The enormous sums that you pay as interest costs can be reduced significantly in the short term. Short-term loans ensure a hassle-free life ahead, once they are done with their short tenure increasing your cash flow. It creates a space for other financial goals in life forward. Long-term loans are burden-free due to the reduced EMIs when compared to short-term loans of the same amount.
After weighing the benefits and detriments of long-term and short-term home loans, you can opt for the one that matches your financial status, obligations, and aspirations.
Short Term vs Long Term Loans FAQ's:
Long term home loans are the loans that lend you money for long tenures ranging from years up to 30 years. At the same time, short term home loans lend money for a period of fewer than five years.
Interest rates apply to the home loan that you have to pay to the lender for the loan. Interest costs are the cumulative amount of money that you pay owing to the interest rates by the end of your tenure.
There are two types of interest rates. Fixed-rate that charges the borrower with a fixed interest rate throughout the tenure of the loan. The other is the floating interest rate that charges the borrower with the interest rates that are subjected to fluctuations based on the market trends.