Short-term loans or long-term loans – How to choose?

A loan’s tenure impacts the interest rate and EMI. Hence, choose between a short-term loan and long-term loan carefully.

Short-term loans
● Maximum tenure - 3 years
● Payday loan is a common variant – simple eligibility and quick disbursement

Long-term loans
● Tenure is more than 3 years and up to 30 years
● Can be secured or unsecured
● Unsecured loan has higher interest rate than secured

Consider these factors before choosing a loan type

Purpose
● Short-term loans can meet working capital needs or emergency expenses
● Long-term loans are ideal for buying plots, machinery or business expansion
● Long-term loans take longer to process

Cost
● Short-term loans have higher interest rates and processing fees

Risk of debt crisis
● Short-term loans are harder to repay
● Short tenure and high interest rate can create a debt crisis

Eligibility
● Short-term loans – minimal documentation and fast processing
● Long-term loans – lender checks business profitability, credit score, income details and projected statements

Paperwork
● Short-term loans – basic paperwork required, including identity, address and income proofs
● Long-term loans – extensive paperwork regarding the business and owners required

Pre-approval
● Possible for short-term loans
● Not guaranteed for long-term loans

Processing time
● Short-term loans – minimal time needed
● Long-term loans – lot of time involved to check all documents

Prepayment penalty
● Short-term loans – have a penalty
● Long-term loans – might not have a penalty but depends on loan terms and conditions

Both long-term and short-term loans have pros and cons. Choose carefully as per your need.

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