Short vs Long Term Loans
04.06.2020 by Dimi V
People have financial needs. However, some come at times when people are not financially capable of fulfilling them, and that throws them into a financial crisis. Such are the times people resort to borrowing money to finance their needs. People will borrow money for different reasons and different periods.
Many different factors affect the loan type offered and the amount of repayment time. There are primarily two types of loans; short term loans and long term loans. Before you go ahead and borrow any of these loans, there are many things you need to put into consideration.
This post details everything you need to know about short term and long term loans. The purpose is to inform you about the perks and possible demerits of either type of loan that by the end of this post, you can make an informed borrowing decision.
Different lenders offer different and many types of short term loans. Typically, these are loans that have repayment of 12 months or less. Lenders will provide these loans to you to meet your immediate liquidity requirement. Before they are released, they take into account your specific profile and borrowing needs.
Key features of short-term loans
Some few things are typically associated with short term loans. They include:
- Higher Annual Percentage Rate (APR): The shorter the term of the loan, the higher the interest rate offered. It means that the amount of interest accrued will be higher than those on long term loans.
- Repayment: In most cases, you have to pay both the principal and interest within the term of your loan. They often have one or two week’s repayment schedule.
- Lower borrowing amount: You won’t be expecting exorbitant amounts of money from short term loans. Unlike long term loans, the numbers are significantly lower.
- Unsecured: Short term loans are mostly unsecured. Since the amount borrowed is quite lower and the repayment period is shorter too, there is no great need for collateral on such loans.
Popular types of short term loans
Some of the popular types of short-term loans offered by different lenders are:
1. Line of Credit (LOC)
When you approach a financial institution to borrow some money, they will determine the highest possible loan amount they can offer you basing your creditworthiness. We call this a LOC loan. For instance, if you have a higher credit score, you will receive a higher loan amount and vice versa.
This type of loan tends to have fixed interest rates for the whole LOC period. Any hikes in the rates may only arise if you are late or default on your payments. Once you repay your loan in full, you will be eligible for a fresh line of credit.
2. Emergency Loans
These loans are designed for people who need immediate financial help, especially when it’s a last-minute emergency. These loans are offered to help fix things like broken-down vehicles or boilers that are immediately required to do something.
3. Three-month loans
It is a prevalent type of predetermined repayment period in the UK. They are popular because they come with manageable repayment time frames. A wide range of borrowers in the UK always choose to go for these loans.
4. Short-term Bank Loans
These are quite different from LOCs. Once you make your full repayment, it will be up to you to choose whether you want to borrow again.
5. Payday Loans
This is a suitable loan for small-time businesses or individual borrowers. The amount you borrow will be determined by the much you earn. It is usually offered as a percentage of your income. The repayment is commonly made when you receive your next income of paycheque.
Even though these are mostly HCSTL, they are often offered to people who are in need of emergency dentures, as a result of teeth fallout or breakage. They can also be provided to persons in need of dental treatment but who don’t otherwise qualify for free dental care in the UK.
- They are more accessible.
- They have faster approval times.
- They can increase your credit score.
- You get lower borrowing amounts.
- They are not the best for long-term projects.
- They can easily strain small-time borrowers.
These loans are essentially short and long-term loan hybrids. These loans are not quite popular because a lot of people would rather skip to long-term loans. However, these loans have higher interest rates comparatively; the documentation involved is easier compared to long-term loans.
Most of the long-term personal loans have a repayment period of more than 5 years, sometimes up to 7 years. There are many different types of lenders, including credit unions, banks and online lenders that offer different types of long-term personal loans.
Long-term loans are ideal for people who need large sums of money with a long payback duration. For instance, you can borrow up to £50,000 for your kitchen remodel as a long-term loan to reduce your monthly payments. Just like any other funds, you can then use it for any purpose you please.
The best example of a long-term loan is a mortgage loan, to facilitate you acquire a property. Nonetheless, there are many other types of long-term loans. These loans are often more secure than short-term loans.
- They come with highly competitive rates.
- Lower monthly payments.
- Larger amounts of money.
- Extensive paperwork.
- Loan approval time can be very time-consuming.
- You risk losing your collateral in case you default.
Types of long-term loans
Some of the most popular long-term loans in the UK are:
1. Second Mortgages
It is a mortgage loan you can take in addition to your typical first charge mortgage. In case you need additional finances, you can apply for a second mortgage loan that can be secured against the existing equity in your property. They can amount up to millions of pounds, and that is why the amounts are spread for an extended period.
2. Home Improvement Loans
These loans are tailored for specific home improvement purposes, including light and substantial refurbishment projects. Home refurbishments vary in costs. For instance, basement renovations and loft conversions can eat up tens and sometimes hundreds of thousands of pounds and as such require larger loans with longer repayment periods.
These are loans you can secure against your car. You can secure a logbook loan of up to many thousand pounds against your vehicle provided it is not a business car. You only need your vehicle as collateral. You essentially get a loan by signing over the ownership of your vehicle.
Logbook loans vs. Vehicle equity release loans
Log book or V5C loans are easier to get compared to many other loans. It is one of the quickest ways you can get money when you need it, provided you have a car. However, there have been many concerns about how logbook loan companies handle their business. That is why there has been a steady decline in the number of people taking out these loans and looking for alternative options.
Just as fast as it is to take out these loans, it's just as fast as how your car will be repossessed if you default on payments. In most cases, many lenders downplay the worst-case scenario to borrowers. You have to take caution because they have been termed as toxic loans since how the companies offering these loans have been questioned severally.
The logbook loan industry is marred with complaints and risks. Some of the most common risks associated with these loans are
- Losing ownership: If you borrow money after signing over the ownership of your car and fail to keep up with the repayments, your car will be repossessed and even sold. However, the risk is relatively acceptable, how these loans are designed to make it hard to keep up. Since you sign over the ownership of the car and you handover the logbook, repossessing the car is fairly easy upon default. The vehicle will be sold for amounts less than the market value to offset the balance. If it is not enough, you will still have to pay the difference while risking the accumulation of hefty interest rates.
- Bad reputation: Moneylenders in this industry don’t have a good reputation. Clients are always left stressed and regrets.
- Hefty interest rates: Most people avoid these loans because of the massive interest rates involved, but some just take them out because of desperation. They can go as high as 500%.
Although you will get the money you need without a credit check, these loans will most likely leave you vulnerable and full of regrets. That is why you need to consider better alternatives, like vehicle equity release loans.
Auto Equity Release Loans
People love their cars, no doubt. After homes, stats show that people spend a lot of money on cars, caravans and even motorbikes.
Auto equity loans give people the chance to take out a loan based on the value of their car. The structure of these loans is similar to mortgage loans where your car is used as the collateral for the loan you take out. That makes car equity loan a form of secured lending. This is the primary reason why more people find them safer than other log-book loans.
The benefits of these types of loans outweigh those of log-book loans and it can be challenging to understand why people would still prefer log-book loans. They are more flexible since the terms will be based on your ability to payback. This means that your repayments could be tailored to be made over time depending on your income. Furthermore, you won’t have to sign over your ownership to the lender and you can continue using it and there is no need for credit checks.
A financial crisis may cause for desperate measures to raise money. However, you should try as much as possible not to let your desperation cloud your judgement when it comes to borrowing money. Make sure that you assess all the benefits and risks involved. If you see the risks are outweighing the benefits, it is probably a good idea to avoid it and look for a better alternative.
We offer secured auto equity release loans in case you need money. Just get in touch with us and we will be glad to be of help.