Home Business Insights & Advice Short-term vs long-term loans

Short-term vs long-term loans

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29th Apr 20 11:10 am

People borrow money for all nature of reasons and for different amounts of time. There are various factors which affect both the type of loan provided as well as the amount of time for which a loan is provided. Short term loans typically include personal loans which will include the likes of payday loans and logbook loans. Longer term loans (more information) will encompass loans which will be greater in size such as mortgages and second mortgages and other homeowner loans.

Interest rates on the various forms of loans will also vary. In cases of mortgages and home improvement loans for example, the interest rates will not be the same as a high cost short term loan (HCSTL) which due to the short-term nature of such loans, will always be higher.

However, many longer-term loans like mortgages can sometimes incur early repayment charges (ERCs) should the borrower wish to clear their debts earlier than the agreed repayment term. You will need to discuss this with the lender in each case who will be able to advise accordingly. When it comes to short term loans, increasingly, fewer lenders than in past times are allowing the incurring of ERCs, with many lenders encouraging borrowers to pay off their debts early if possible.

Popular types of short-term loans

There are many types of specific short term loans which will be tailored by lenders and underwriters to be specific for determined purposes. These loans, although in effect, very similar to generic shorter term loans like payday loans, take into account the specific needs and requirements of specific borrowers with specific borrowing needs and profiles:

Emergency loans – These loans are designed for those times when something very ‘last minute’ occurs unexpectedly that needs money for its fixing. This usually includes things like broken down boilers, leaky roofs and broken-down vehicles that are immediately needed or required for work and employment.

Dental loans – Although a form of HCSTL for the most part, these loans will usually be used for people that for example need emergency dentures (find out more) as a result of broken teeth or a tooth that falls out. They may also be used in cases of other emergency dental treatment for those that may not otherwise qualify for free dental care in the UK.

Three month loans – A popular and predetermined time-period bound loan, these are a popular type of HCSTL which due to the manageable time frame they offer for repayment, are particularly popular in the UK for a wide range of borrowers with a plethora of different needs.

Popular types of longer-term loans in the UK

An obvious candidate that qualifies as a longer term loan is of course the normal, everyday mortgage which is used more often than not to facilitate a property purchase. However, there are also other specific types of longer-term loans which will tend to be secure in their nature as opposed to shorter term loans which will more than likely be unsecured, with no collateral secured to the loan.

Home improvement loans – Such loans are used for the specific purposes of home improvement, both light and heavy refurbishment projects. Some refurbishments may be relatively lower in their costs whereas others, such as larger loft conversions and basement renovations may be many tens or even hundreds of thousands of pounds. As such, larger loans of this nature can take rather longer to pay off, as it is in the interest of lenders and borrowers to spread out repayments over a longer period of time.

Second mortgages – These mortgages, as the name suggests are taken in addition to a typical first charge mortgage. They are suitable for people who need additional money which can then be secured against existing equity in a property. These loans can be for up to as much as millions of pounds and so spreading the repayments out are of use to all involved.

Logbook loans – Secured against what is often people’s second-most expensive asset (their vehicle), logbook loans allow people to take out loans of up to many thousands of pounds, secured against their vehicle, so long as it isn’t a business vehicle. Thus, borrowers can apply for loans with their vehicle as collateral.

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