If you’re in need of a financial boost, then taking out a personal loan is one avenue you can explore. But first, it’s important that you gain a full understanding of what they are, how they work, and how much you’ll be expected to repay. Unless you take out an interest-free loan, the final amount you owe will be more than the sum you initially borrowed.
If you’re seeking some financial assistance, rest assured that you’re certainly not on your own – data published in 2018 by UK Finance revealed that personal lending increased four times faster than wages – and it’s crucial that you choose the right option for you.
When you take out a loan, you will be required to pay it back over a certain period of time. This can range between a couple of months and several years, depending on the one you have chosen. So, which is more suitable, a short-term loan or a long-term loan?
What to consider before taking out a loan
It’s vitally important that you take the time to weigh up all your options before applying for finance, and the likes of the Money Advice Service can offer plenty of sound and impartial guidance. As a starting point, it might be worth asking yourself these questions:
- Why are you borrowing this money? Is it for the right reasons?
- How much do you need to borrow?
- Are you aware of the terms and conditions and how the interest rates will affect the amount you owe?
- Can you afford to make the repayments on time and in full?
If you can answer these questions to your own satisfaction, then you can begin to decide between short and long-term loans, their pros and cons, and which might be most helpful to you.
What are the pros and cons?
As the names suggest, a short-term loan is repaid over a period of time, perhaps as little as a few months, whereas a long-term loan is likely to be paid back over a number of years.
Some of the advantages of short-term loans are:
- They may be more accessible if you have a poor credit history
- The application process can often prove less cumbersome
- It’s very unlikely that you’ll be asked to put up any of your assets as collateral
- The amount of time you spend in debt is shorter
Some of the downsides are:
- Short-term loans often come with higher interest rates
- The monthly instalments are typically more expensive
Meanwhile, the benefits of long-term loans are:
- You gain access to a greater amount of funding
- The interest rates tend to be lower
However, it’s important that you’re aware of the drawbacks of long-term loans, such as:
- The period of time you spend in debt is greater
- You may be asked to secure the money against something you own – such as your home
- The overall interest costs tend to be higher, due to the extended repayment terms
What are they most suitable for?
Due to the larger amounts of money available, long-term loans tend to be most suitable for large projects such as buying a house or financing a car. Short-term loans, on the other hand, can be useful for covering sudden and unexpected costs, such as vehicle repairs or to fix a broken boiler.
If you’re thinking about applying for finance, you may want to weigh up all of the factors mentioned above before deciding between a short or a long-term loan.