There are several ways to classify loans: by means of the type of guarantee used as collateral and depending on the duration of the loan.
Based on the type of collateral, we can distinguish four types of loans: personal collateral loans, collateral loans, home equity loans, and pledge collateral loans.
If, on the contrary, we take the duration of the loan as a reference, we find two types: long-term loans and short-term loans. Let’s see how the latter are distinguished!
Differences between long-term loans and short-term loans
The main distinguishing feature between a long-term loan and a short-term loan resides, as we have mentioned, in the duration of the loan. While the first has a maturity of more than one year, the short-term loan does not exceed 12 months.
Another difference is that short-term loans are usually used to request amounts of money lower than what is usually requested in long-term loans. This is because short-term loans tend to focus on meeting specific and urgent needs, while long-term loans are used to finance large operations such as the acquisition of a property, a vehicle, the start-up of a business or any other operation whose development is carried out over a long period of time.
When opting for one or the other option, it is not only essential to be clear about these aspects, but also what advantages and disadvantages each of them entails. Let’s see them!
Advantages and disadvantages of short-term financing
The most notable advantage of short-term financing lies in the possibility of obtaining money immediately.
In a few minutes we can request our short-term credit online and obtain an almost instantaneous response. It does not require excessive bureaucratic procedures or paperwork and, as a general rule, it is not necessary to physically go to the office to formalize the procedure.
Another advantage of these loans, compared to long-term loans, is that they have lower interest rates and, therefore, the cost of financing is lower.
However, short-term loans, as we mentioned, offer a smaller amount of money (usually not exceeding 1,000 euros) than long-term loans. This is an essential aspect that the applicant must take into account when deciding on one or the other option.
Another aspect to keep in mind in short-term loans is that the repayment period of the borrowed amount is shorter and cannot be postponed. If this happens, it would be necessary to pay high default interest for having failed to comply with the stipulated return period.
Advantages and disadvantages of long-term credits
Adaptability and flexibility are two of the most notable advantages of long-term loans. By offering the option of returning it over a long period of time, it allows, in many cases, to choose the number of installments with which the loan will be amortized. That is why long-term loans are better suited to the solvency of each.
In addition, in many cases, long-term loan contracts can be modified or renegotiated, and there are few occasions when grace periods apply. The key to these loans is that, between the lender and the borrower, they establish a long-term relationship, which gives priority to establishing optimal conditions for the borrower and that, at the same time, the lender can receive the borrowed capital plus interest .
Despite these advantages, these types of financial products also have their “buts”. In addition, requesting fast long-term loans seems more complicated than in the case of short-term loans since greater detail is usually required in the documents and this can delay the management and granting of them. Solvency is a determining factor when applying for any type of loan, even more so in long-term loans, so if we do not have any monthly income, it is very possible that we will be denied it, since in that case Asking for a loan could be a problem for us.