Long Term vs Short Term
What is a short-term loan?
Short-term loans are loans issued for up to 30 (31) days. This service is offered by the majority of microfinance organizations operating in the United States. Such loans are usually called “payday loans” – the client addresses the payday lending company to solve temporary financial difficulties. Having received the salary, the client pays off the debt in one payment.
What are long term loans?
Long-term loans are loans with a maturity of more than 30 (31) days. The regulatory innovations in relation to the microfinance market are forcing companies to switch to long-term loans, since not all companies will be able to work with the restrictions described above.
Reforming the payday lending market has led to the development of a special product – a payday loan. This is a shorthand for the MFI service most demanded by borrowers. This is a specialized type of loan that is not subject to the interest rate restrictions. The terms for such a product are as follows:
- the amount is up to $2,500;
- the term is up to 30 (31) days;
- interest rate – unlimited.
The amount of a short-term loan depends on the policy of a particular MFI. Many of them issue online loans up to $2,500. There are many companies that work only in the segment of short-term loans. At the first contact, the borrower can expect to receive a loan at reasonable interest rates.
In the overwhelming majority of cases, the amount of a short-term loan does not exceed $5,000. Medium-sized companies as well as small players in the microfinance market operate with smaller amounts. Limitations can also be related to customer category. When first approached, companies usually do not approve of the maximum possible amount. You can check the client for reliability by limiting the amount of the first loan: to $500. In some cases, the amount is higher.
What are short term loans?
Cash taken out to customers for a period of up to 1 year are called short-term loans. The client can receive money by submitting a minimum package of documents to the bank. The response to such a request comes in a short period of time.
This type of lending is considered to be the most demanded. This is because the size of the loan itself is relatively small and you can get it on the day you apply. An additional advantage is the possibility of early repayment of the loan at any time, without charging any commission fees. Only those clients who have a positive credit history with third-party credit institutions can receive funds from the bank.
Interest rate on short-term loans
Each person has the right to decide independently what kind of loan he needs. The fact is that the interest rate on loans for short periods is much higher than on those products that are issued for a period of over 5 years.
Lenders respond by saying that any short-term loan carries more risks for repayment. With this arrangement of credit funds, the bank does not require a full package of documents and guarantees from the borrower. In addition, any individuals, for whom the requirements are minimal, can take money for a short time. From this, the loan rate becomes higher.
Types of short-term loans
There are many different types of short term loans. However, the most famous of them are:
- overdraft. It is considered common in the USA. This type of lending provides the signing of a specialized agreement between the parties. A client who has issued an overdraft has the right to go to the minuses within the limit, that is, to spend the funds provided by the bank. For such loans, the interest rate is low, and with a systematic replenishment of the bank account, the interest is recalculated automatically.
- under the provision of working capital. This loan is available only for legal entities. Thanks to the funds provided, organizations are able to solve their difficulties on favorable terms with minimal overpayment.
- credit card. It is considered the most demanded type of lending. An individual can issue a card on the day of application. Based on the interests of the client himself and his level of reliability, the bank sets a certain credit limit on the card, which he can use for 3-5 years. With the timely payment of all monthly payments and maintaining a good credit history, the bank over time increases the limit of funds on the card.