short and long term loan

Short and long term loan

A loan that needs to be repaid in regular payments over some time is called a term loan. The tenure of most of the term loan is between one to ten years. The tenure of the term is decided at the time of application by the bank or financial institute. The categories of the term loan are secured loans and unsecured loans. The loans which are for short duration usually less than one year are called short term loans and loan which have a span of five or more years are classified as long term loan. In some instances, customers have the option to choose between a fixed rate of interest and a floating rate of interest. A fixed-rate of interest stays constant throughout the term loan, which means that the borrower will pay the interest based on the rate set at the time of loan application.
On the other hand, a floating rate of interest fluctuates with market conditions, which changes the installment amount as well. A fixed-rate of interest is advisable for long term loans the borrower of short term loan can take floating rate interest.

Short term loan

The term loan which has a repayment period of one year or less is considered as short term loans. The interest rate is higher than the other types of loans. In the developed countries many banks offer unsecured short term loan, which is also known as payday loan for the tenure of three or four months. This concept is, however, yet to take off in India. But certain banks do offer credit cards to customers to buy consumer electronics with loans that have short term tenure of 3 to 6 months.

Eligibility criteria

  • The person should have a regular income.
  • The age group should be from 21 to 60 years.
  • A good credit score can only release the amount of loan.
  • Good creditworthiness, i.e., a credit score of 750 or above

Features of short term loans

  • The interest rate for short-term loans can be anywhere from 12% to 20% per annum.
  • Thought the borrower has a bad credit history; some banks will still allow them for short term loan. But the interest rate on loan will be high.
  • The paperwork for short term loans is minimum, and processing is fast and straightforward.
  • In short term loans, close attention is paid to the income stability and the financial capacity of that person.

Long term loans

The long term loan has a tenure of 3 or more years. The maximum tenure of the loan in India is for ten years. They help during financial needs and can be repaid in small installments or EMIs. Such loans allow people to enjoy maximum benefits from schemes offered by various public and private sector banks.

Eligibility criteria

  • The person should be at the age gap between 21 to 60 years.
  • The person should have a regular source of income
  • The person should be an applicant in India.

Features and benefits of long term loan

  • The rate of interest is low when it is compared with other short term loan types.
  • When the loan can be repaid over a long period, one must pay the monthly installments regularly.
  • Many financial institutions, as well as banks, provide long term loans at fixed and floating interest rates. One must always go for a fixed interest rate for the long term since the floating interest rate fluctuates with the market and economic condition.
  • Collaterals or other forms of security are a common feature for long term loans. It is understandable for the bank to minimize the risk involved. This is why long term loans are almost always secured loans.

Hope that this has been a helpful guide to understand how the term loan facility works and how to incorporate it into your financial model.

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