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Differences between long and medium term loan as well as short term and payday loans

Posted 18.02.2018
Differences between long and medium term loan as well as short term and payday loans

Loans are useful and sometimes necessary facets of a healthy financial life. While the idea of willingly taking on debt can be scary, choosing the right loan for your needs can help you build your credit while purchasing items that would otherwise be out of reach.

What is a loan?

A loan is temporary transfer of money, which the borrower agrees to pay back with interest. Within the broad definition of a personal loan, there are many different types. You might be familiar with loans for cars or home loans, but people take out loans for many different reasons. Loans can be broken down into long term, short term, medium term, and payday.

Long term, medium term, short term, and payday loans differ in three ways:

  1. Duration of loan;
  2. Amount borrowed, and
  3. Interest rate.

In a nutshell, long term loans will have the longest duration, the highest amount borrowed, and the lowest interest rate. On the flipside, payday loans will have the shortest duration, smallest amount borrowed, and highest interest rates.

Long term loans are for your largest purchases

Entering a long term contract can be scary stuff

Entering a long term contract can be scary stuff (source)

Long term loans are the loans that people are most familiar with. Home loans fall into this category. Long term loans are 10 up to 30+ years. Most long term loans are secured loans – meaning there is collateral placed against the debt. For example, with a mortgage, the house itself is the collateral.

Because of the long repayment period, long term loans are reserved for the largest amounts, usually in the tens of thousands of dollars range. The interest rates are calculated based on credit, but because these are usually secured loans, long term loans will offer the lowest interest rates of every type of loan.

Of course, over the duration of the loan, even a low interest rate can accumulate into a significant amount. On the bright side, since the long term loans have such long payment duration the monthly payments themselves are usually rather low compared to the amount of debt.

Medium term loans are for large expenses.

Australian money

Australian money (source)

Medium term loans (also known as personal loans) exist in the gap between short and long term loans. The repayment duration of these loans is between one and five years. Medium term loans are often taken out to finance home renovations, holidays, and complicated medical procedures. It is not unusual to see these loans targeted toward people with small outstanding debts.

Medium term loans can be secured or unsecured. Borrowers will also notice that medium term loans usually come with a highly monthly payment and higher interest rates than long term loans. Medium term loans can see from 7% p.a. for secured loans and up to a 29% p.a. for high risk unsecured loan. Though you’re doing well if you get loan around 11% p.a.

Short term loans and payday loans are for emergencies

Cash money, yo

Cash money, yo (source)

Short term loans last between one month and one year. These are often taken out for unforeseen emergencies like home or car repairs. Short term loans are for amounts up to about $4,000. When choosing a short term loan, it is important to find a reputable lender otherwise interest rates can trend sky high.

Payday loans are the shortest duration loans. The idea is that these loans will be repaid on your next payday, hence the name. Payday loans can last from one day to one month and the amount borrowed usually fairly small, between $50 and $4000. These loans are very risky and should only be taken out in true emergency circumstances, as the interest rates for these types of loans are incredibly high. It is important to note that interest for payday loans is calculated per day and not per month. Borrowers should take great care in choosing a payday loan to avoid loan sharks, especially if they have a history of poor credit.

What loan is right for you?

While loans used to be reserved for only those with the highest credit scores, it is now possible for nearly anyone to qualify for a loan if they find the right financial institution. BestFind can help you choose amongst the great number of providers, based on your specific situation. Of course, any debt that you agree to take on should be carefully thought out before signing on the dotted line.

What loan you ultimately settle on will depend on your needs and your finances. Each loan is better suited toward specific purposes.