Short-Term Loan vs. Long-Term Loan: Understanding Personal Loan Duration

In this Tower Loan article, we explore the pros and cons of a short-term loan vs. long-term loan to help you make the best financial decision.

What Is a Short-Term Personal Loan?

Short-term loans are generally less than 12 months. This is the typical repayment period of a short-term loan, which is commonly used for emergency expenses. For example, many people use short-term loans to pay for car repairs and medical bills.

Some short-term, high APR loans are capped at $500 to $1,000 and must be repaid quickly within two weeks.

Short-term loans usually come with higher interest rates and monthly payments than long-term loans. But with a short-term loan, you’ll be responsible for fewer interest payments overall than if you’d agreed to personal loan terms of more than a year.

Pros of Short-Term Loans

• Flexible to use for whatever you need
• Easy to qualify for and access quickly
• Quick repayment window, limiting the amount of interest you must pay
• Opportunity to boost your credit score with on-time payments

Cons of Short-Term Loans

• Higher interest rates than long-term loans
• An aggressive repayment timeline that could be challenging to stick to
• Frequent payments required to pay the loan off quickly
• Potential to incur more debt if not managed wisely

What Is a Long-Term Personal Loan?

When you borrow money, you can also opt for a personal loan term length that is longer than 12 months. Long-term loans can extend up to 144 months to give you more time to repay your debt.

At Tower Loan, most of our loans come with personal loan terms of 12 to 36 months. For this time frame, you can borrow up to $6,000 online or up to $20,000 or more with a branch visit.

People commonly take out long-term loans for home improvements, other major purchases, and to consolidate debt. With personal loan terms, you’ll enjoy lower monthly payments but higher total interest costs for the duration of your loan.

Pros of Long-Term Loans

• Lower interest rates than short-term loans
• Manageable monthly payments to help you with budgeting
• Flexibility in the repayment period and with paying other obligations
• Structured repayment schedule to support financial stability
• Opportunity to build your credit over time
• Potential to repay your loan early for reduced interest expenses

Cons of Long-Term Loans

• Higher overall interest costs over the personal loan duration
• Higher total cost due to paying interest for longer
• Time-consuming burden of having an extended loan term

Comparing Short-Term and Long-Term Personal Loans

As you can see, there are some key differences between a short term loan vs. long term loan. Let’s look at the major points of comparison for long term loan vs. short term.

Monthly Payment Differences

One important distinction is that short-term loan terms come with higher payments, while long-term loans spread the cost over time. Therefore, it’s essential to assess your financial situation and determine what feels more comfortable to you: paying more quickly or paying less over a longer commitment.

Total Interest Paid

Another way to compare a short-term loan vs. long-term loan is to look at the total interest paid.

Now that you understand the answer to “What is a loan term?” you can see how longer terms lead to more interest paid overall. Personal loan term length can impact how easily you can pay for basic living expenses and desirable splurges for just a little while or considerably longer.

Credit Score Impact

Something else to consider is that personal loan term length also affects your credit utilization and score. While both short-term and long-term loans have advantages and disadvantages, very short-term, high-APR loans were designed for people with poor credit scores and no collateral. Individuals with poor credit scores often find it more challenging to find as many loan options and face higher interest rates than people with higher scores.

However, longer-term personal loans can be a safer choice than loans that must be paid back quickly. The main advantage of personal loans over short-term, high APR loans is that you will repay the principal plus interest in one payment. When you make these payments in the agreed-upon amount and on time, you can improve your credit score for the future.

Flexibility in Repayment

Is a lower or higher loan term better for your ongoing monthly budgeting?

Shorter loans reduce your long-term debt burden, giving you more opportunities in the foreseeable future to live without debt. However, longer loans ease your monthly budget pressure so that you can comfortably afford the things you need and want on a regular basis.

Consider your short-term and long-term financial goals and how a new loan will impact those goals for yourself and your family.

Factors to Consider When Choosing a Loan Term

What’s the best loan term in months?

In our experience in the loan industry, we’ve found that many people benefit from a loan term of 12 to 36 months to give them ample time to repay the funds without imposing a huge future burden.

However, many factors impact personal loan term length that you should consider before signing off on new money to borrow.

To start, consider your current financial situation and your ability to make payments. How much income do you expect to receive from your work and other sources in the near future, and what other expenses do you need to handle within the next year?

You’ll also want to consider the purpose of your loan and whether a short-term loan vs long-term loan aligns with your goals. Customers use our personal loans for everything from moving expenses to weddings, funerals, holiday gifts, home upgrades, car repairs, medical costs, and much more.

Carefully review the interest rates and fees associated with any loan that you are considering taking out. Depending on the lender and type of loan you choose, origination fees or early payoff penalties may apply.

However, consider whether early repayment is an option to reduce the total interest costs. It may be worth taking out a longer-term loan and then paying it off early to achieve financial flexibility, but not paying more to your lender than necessary.

Tips for Choosing the Right Loan

Choosing a personal loan length is an important decision that can impact your ability to keep up with monthly bills, live comfortably, and invest your income wisely. Therefore, you might want to consult a financial advisor to discuss your personal situation and learn about the implications of a long-term loan vs. short-term loan.

From Tower Loan’s financial pros, here are some tips for choosing the best loan for you:

• Check your credit score so that you can qualify for the best rates
• Compare multiple lenders and interest rates for a short-term loan vs. long-term loan
• Search for lenders that offer the opportunity to pay off a loan early without penalties
• Look into autopay discounts to lower your APR

Once you’ve assessed how a new monthly payment will fit into your budget, you’ll be in a better position to decide if a lower or higher loan term is better for you. Very short-term, payday-style loans should be approached with extreme caution. Meanwhile, longer-term loans often offer better deals to borrowers when they can commit to the repayment schedule and meet eligibility requirements.

Tower Loan is here for you if you need help making an informed decision about a new personal loan. We have offices in six states and over 240 cities to serve you and get you the money you need quickly and responsibly.

Choose the branch location nearest you to learn more about our loans and how they can help you get to where you want to be in your financial life.