Short-term loans vs long-term loans

What is a term loan?

A term loan is a type of borrowing that you repay over a set amount of time. You receive a lump sum upfront and repay it with regular instalments that include interest. This fixed repayment structure means you know the exact amount and how long you’ll be paying it off, which can help with budgeting.

Term loans are different to revolving credit (like credit cards). Revolving credit is where you have a borrowing limit and can repeatedly borrow up to that limit, as long as you make the minimum repayments.

 

What is a short-term loan?

A short-term loan:

• has a short repayment period – from one month up to one year
• is usually unsecured – which means you don’t need to be a homeowner to apply
• is for a relatively small amount of money – up to around £3,000
• can be useful in a financial emergency - like if your boiler or car breaks down

Pros vs. cons of short-term loans

Pros	Cons
Quick access to cash – some lenders may transfer the money to you on the same day. But be careful not to rush into a decision.	They may have higher interest rates than other types of credit like long-term loans or 0% credit cards and overdrafts. Check the APR before applying to find out the total cost of borrowing over a year, including all interest and charges.
You’re not tied into repayments for several years. So, you don’t need to worry about being able to pay the loan in the long run.	Not suitable if you need to borrow a large amount – if you need to borrow more than £3,000, a short-term loan may not be right for you.
Your credit score may go up – if you always pay your loan on time.	Missed payments can damage your credit score. To avoid missing payments, consider setting up a Direct Debit.
Your property won’t be at risk if you fall behind with repayments on an unsecured loan.

 

What’s the difference between a short-term loan and a payday loan? 

A short-term loan is a loan which runs for less than 12 months, and has an APR over 100%. Payday loans are a type of short-term loan.

A payday loan allows you to borrow a small sum of money (up to around £1,000) and pay it back in full within a month, using your next pay cheque. They often come with high interest rates because you are expected to pay them back quickly.

With other types of short-term loans, you may be able to borrow a bit more money (up to £3,000). You can spread the repayments over several months instead of having to pay the full amount within one month. This is still much shorter than most standard personal loans.

What is a long-term loan?

A long-term loan:

• has a longer repayment period - between 2 and 30 years
• can be a secured loan or an unsecured personal loan - secured loans are tied to your property, whereas unsecured loans don’t require any property as security for the lender.
• is for a larger amount of money - the exact amount you can borrow depends on the lender and your individual circumstances
• can be used to pay for larger expenses, such as home improvements or debt consolidation

Pros vs. cons of long-term loans

Pros	Cons
You can borrow more with a long-term loan, so this may be a good option if you need to make a large purchase or pay for a big expense. But you should only borrow what you need and can afford to pay back.	If you’re consolidating existing debt and spread the  repayments over a longer period, you could pay more interest in total.
Interest rates are usually lower with long-term loans, if you compare similar amounts.	Payments tend to run for longer periods, so changes to your financial circumstances can have more of an impact to future affordability. If you want to repay the loan early, you may face early repayment charges depending on the terms and conditions.
Your credit score could increase – if you always pay your loan on time.	As with all loans, missed payments can affect your credit rating.
You could have lower monthly repayments if you spread them over a longer timeframe.	Your property could be at risk if you take out a secured loan and fall behind on the repayments.

 

Who can get a short-term or long-term loan?

To get either type of loan, you’ll need to meet the lender’s eligibility criteria. Most UK lenders will ask that you are:

• a UK resident
• at least 18 years old
• employed (or have a steady source of income).

They will also look at your affordability and credit score to see how well you manage your money and how likely you are to keep up with the loan repayments.

If you are looking to get a secured loan over the long term, you’ll need to be a homeowner, and the lender will also consider things like your property value and how much equity you have.

 

Which type of loan is better, long term or short term?

Which type of loan is best for you depends on your credit history, financial circumstances and the amount you need to borrow.  

If you only need to borrow a small amount, usually £3,000 or less, and can pay it back within a year, then a short-term loan might be the right choice for you.

A long-term loan might be the better option for you if you need to borrow more and believe that you can pay the money off over several years.

There are several pros and cons that you should consider when deciding which type of loan is the best for you.

 

Is it easier to get a long-term or short-term loan with bad credit? 

If you have experienced financial difficulties in the past and have a low credit score or bad credit history, you may find it easier to borrow a small, short-term loan than an unsecured long-term loan.

Or you could look into getting a bad credit loan, which is designed for people with poor or thin credit histories. Higher interest rates tend to apply to both.

If you are a homeowner and want to borrow more over a longer time, then you could consider getting a secured homeowner loan. These are usually easier to get than unsecured personal loans and come with lower interest rates. This is because there is less risk to the lender. They can take your property as security if you can’t repay what you owe.