When considering a personal loan, there are a huge number of options available to borrowers. You should think about the amount you need to borrow, the reasons why you need the cash and how much you can afford to repay. You should also consider the length of time over which you need to borrow and repay the money.

To explore these options, it’s good to understand how these loan terms are defined. Generally, a loan under 12 months is considered a short-term loan. This can vary between products and providers but is usually where you see these loans fitting in. Terms over 12 months is deemed to be in the standard loans category or ‘longer term’.

Let’s take a look at both short-term loans and long-term loans in more detail to help you decide which option is best for you.

What is a short-term loan?

You will usually be able to borrow a short-term personal loan for a period of up to a year. Sometimes the loan term will be much shorter than this, but a year is often the maximum term offered. There are different types of short-term loans and providers, so it pays to do some serious research into your options if you think you might want to apply for this type of loan.

When applying for a short-term loan, the lender will carry out a credit check to get an idea of your credit history. If you have a poor credit rating you might find that fewer options are available to you and that you may be facing higher interest charges than people with a better credit score. It’s a good move to obtain your free credit record before you start the application process so that you know where you stand.

» MORE: How to find out your credit score

What are short-term loans used for?

Those looking to take out a short-term loan are usually in need of quick cash to meet expenses over a short period. This might mean that your car needs repairing and you can’t afford to get it fixed, or an unexpected bill has come through the door and you need the cash to pay it.

Short-term loans can carry higher interest rates, than standard loans, as well as other charges and fees and should only be taken out if you are sure you can afford to make the agreed repayments on time.

Payday loans, which are short-term loans are intended to help people make ends meet until their next payday, have attracted a lot of bad press. This is because they are often an expensive way to borrow and can lead to people getting into large amounts of debt they cannot repay.

If you are considering a payday loan, only borrow the amount you know you can afford to repay by the agreed date. Ensure you are aware of the interest you will pay over the entire borrowing period and don’t miss repayments.

There are a number of online loan providers available, offering quick cash and fair terms. Some will offer lower interest rates than others and research is needed to ensure you are getting a fair deal.

Short term loans may not be suitable for people with lower credit profiles. Be sure to understand yours before you start apply for loans.

» MORE: Tips for improving your credit score

Current account overdraft: Talk to your bank about arranging or extending your overdraft. Its likely to be a cheaper form of borrowing than a short term loan and should be fairly quick to arrange.
Credit cards: Many credit cards come with interest free periods on purchases, alternatively if you can pay off the credit card within the first payment period you could obtain the money interest free.
Friends & family: A trusted family member may be willing to provide you with funds in the short term. You could even offer to pay them some interest!

Pros and cons of short-term loans

Advantages to short-term loans	Disadvantages to short-term loans
You can access cash quickly There are plenty of borrowing options They don’t tie you into repayments for several years	They charge higher interest rates than standard loans They may carry fees and charges There will be a limit to the amount you can borrow They can lead to further debt problems if you miss repayment deadlines

What is a long-term loan?

Long-term loans are what most people consider to be a regular personal loan available from many places, including banks. As long as you have a decent credit history, have a regular income and can afford the repayments.

Long-term personal loans usually have terms of more than a year and are often repaid over several years, in the form of regular monthly payments to the lender.

Depending on your personal financial situation, you may be able to borrow up to around £50,000 through a long-term personal loan on an unsecured basis. Interest rates will vary between providers and you must carry out sufficient research to ensure you get the right deal for you.

Types of long-term loan

Personal loan: Personal loans are usually available to people with strong credit records and can have flexible terms and repayment conditions, providing you meet the criteria. Many places offer loans, from banks to supermarkets and they can cater for various types of credit profiles.
Peer-to-peer loan: Peer-to-peer loans are growing in popularity and can be a great value option. They usually involve a collection of individual lenders providing a certain amount of cash over a predetermined term. They are arranged by peer-to-peer lending platforms, operating online.
Secured loans/mortgages: If you have a property to secure a loan against, you may be able to take out a secured loan. By offering security in the form of property, you may be able to borrow a much larger amount of money over a number of decades at a lower interest rate than a personal unsecured loan. However, you risk losing your property if you cannot keep up with the agreed repayments.

Pros and cons of long-term loans

Advantages to long-term loans	Disadvantages to long-term loans
You can borrow more than short-term loans Interest rates will usually be lower than for a short-term loan You can choose from many providers There are personal loans available to most types of credit profiles	You are committed to the debt for a longer period of time Extending debt terms will increase the overall amount you have to repay They may carry fees and charges

Short-term vs long-term: the outcome

In conclusion, there are times when a short-term loan can effectively meet a borrower’s needs. However, they can be expensive and must be treated with caution – especially the pay-day loan and doorstep loan varieties.

A long-term loan will usually offer a better deal to borrowers providing they meet the eligibility criteria and keep to the repayment schedule. Whichever loan type you decide is right for you, make sure you research your options thoroughly to enable you to make a fully informed decision.

About the Author

Jim Kersey

Jim brings together unique data insights, contextual knowledge and thought provoking themes, to shed new light on important issues affecting both UK businesses and individuals.

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