Short-Term Vs Long-Term Loans

When is it the right time to take a long-term loan over a short-term loan? When should you take the high payments of a short-term loan? In this article, we’ll answer the biggest question: short-term vs long-term loan - which is right for you?

With so many possibilities for loans today, it’s no wonder that some people feel confused. Especially for someone who’s never taken out a loan before, trying to decipher everything becomes a monumental task. If you’re interested in borrowing money, one of the first things you should understand is the difference between a short-term and long-term loan.

Although the terms sound pretty self-explanatory, there’s more to know about short-term vs long-term loans than just their life span. As an example, these loans are for both personal and business use. Even so, they’re more commonly secured for commercial purposes. Regardless of the loan you opt for, the lender sets a predetermined amount of time in which you have to pay back the money owed in full.

Unique Variations of Short-term and Long-term Loans

Following are several examples of how these two loans differ.

Repayment Schedule

While a short-term loan can stretch out anywhere from three to 18 months, most have a repayment schedule of less than a year. As for a long-term loan, financial experts define this as anything that takes more than 24 months to repay. However, these loans can extend much further depending on the lending institution, the reason for borrowing the money, and if you participate in some type of special program.

Types of Loans

Unlike short-term loans, there are three distinct options for long-term business loans.

  1. Medium-term loans – these loans have a repayment schedule between two and five years.

  2. Long-term bank loans - the repayment schedule for these loans is typically between five and 10 years. However, most lenders will extend that period if the money goes toward buying commercial real estate.

  3. SBA loans – SBA (Small Business Association) loans come from lending institutions that partner with the government rather than the government itself. What makes this particular long-term loan unique is that the government backs it by as much as 85%. That means if you default on an SBA loan, the lender has protection through the US government.

Qualifying Criteria

Between short-term and long-term loans, the latter has stricter criteria for qualifying. The reason is that statistically, long-term loans put lenders at greater risk of default compared to short-term loans. After all, lending institutions offer significant amounts of capital to borrowers over long periods. Therefore, they only loan money to established businesses with excellent credit and years of proven profitability.

As a good rule of thumb, for a lender to approve a short-term loan, you’d need to have a company with at least nine months of operation, preferably more, a credit score of 550 or higher, and annual revenue of at least $50,000. For a medium-term loan, you would need to be in business a minimum of a year, have a credit score of 600 or higher, and have an annual revenue of $100,000, plus.

Then there’s a long-term bank and SBA loan. For each of these, the standard qualifying criteria consist of a minimum of two years in business, a credit score of no lower than 640, and $100,000 in annual revenue.

Keep in mind that for both short-term and long-term loans, every lender is different. While the eligibility requirements might have some similarities, lending practices vary. This is one reason why comparing different loan options before signing on the dotted line is so important. Obviously, you want the best loan, meaning it has favorable terms and interest rates.

Loan Amount

Even the amount of money you can borrow with a short-term vs. long-term loan varies. With a short-term loan and meeting the minimum qualifying criteria, you can typically borrow between $2,500 and $250,000. The amount for medium-term loans is $5,000 to $300,000, long-term bank loans $5,000 to $500,000, and SBA loans, up to $5 million.

Cost of a Loan

For any money borrowed, whether a short-term or long-term loan, you have to pay interest, and often, lender’s fees. Rather than use a structured formula, lending institutions look at various information to determine what exactly a borrower would pay.

Although easier to secure, a short-term loan also presents risks to the lender. For that reason, you’ll pay a higher interest rate than you would on a long-term loan. However, with an established business and excellent credit, you can get the lowest available rate. On the other hand, if you have a younger business and your credit score is right at the qualifying line, the interest will be on the higher end of the spectrum. Usually, the APR on short-term loans ranges anywhere from 8.5% to 80%.

With a medium-term loan, you can expect to pay around 30% APR. Again, depending on several factors, a lender will offer an APR of roughly 5% on long-term bank loans. Then for an SBA loan, the APR starts at around 7%. However, the exact cost of this loan depends heavily on the program, the amount borrowed, and the loan terms. Remember, the quicker you pay back the loan, the less you’ll ultimately spend in interest.

Delivered Funds

Even the amount of time it takes to have the borrowed money in your account varies between short-term and long-term loans. Since qualifying for a short-term loan is relatively easy, borrowers typically receive the funds faster than they would when securing a long-term loan. Compared to an SBA loan, which can take up to three weeks to receive the funds, most lenders deposit money from a short-term loan the following business day.

Deciding on a Short-term Vs. Long-term Loan

As you can see, there are pros and cons to both of these types of loans. A lot of people believe that long-term loans are more advantageous since you can borrow a greater amount of money, pay lower interest and have more time to pay it back. However, qualifying for these loans is more challenging.

A good portion of our decision comes down to what you can qualify for. At the same time, you need to factor in the amount you need and the purpose of the loan. If you’re right on the edge of having a lender approve a long-term loan, you can always find a cosigner.

Although the information provided covers a lot of what you need to know about short-term vs. long-term loans, it’s important to sit down with a financial advisor or lender to gain additional insight before deciding. That way, you make the best choice for your business.