Most people are likely to acquire a loan at some point in time. Whether it is for educational reasons, to support one’s lifestyle or to pay some bills immediately; it is common for people to turn towards loans in order to overcome their financial instability. Most of the borrowers don’t think twice about their loans, primarily due to flexible repayment options and seemingly low costs (interest).

Different types of loans are being offered by different institutions. They primarily differ in the terms and conditions of the loan. Here are the two most common categories of loans and their specifications to help you understand the topic in a better manner.

Short Term Loans

The short term loans typically have a short repayment cycle, well under one year. Consequently, they are given at a higher interest rate to compare with the lender’s earnings on long term loans. There are two most common types of short terms loans.

The Payday loan is considered to be the most popular form of credit being used by people all over the world. It allows you to access emergency cash of up to $2,000 within 48 hours. There are no credit checks or collaterals involved, which makes it the best choice for most people. On top of this, you’ll be required to repay this loan when you receive your next compensation. This gives you sufficient leverage to cover for urgent car repairs, pay unexpected bills and keep yourself afloat amidst turbulent times.

The second most common short term loan is the flexible loan. You can acquire up to $25,000 in credit for a period of 12 months. The purpose of this loan may vary according to your personal needs. In the absence of a credit history, your lender will charge high interest rates to counter the high risk. The processing may take some time as well.

Long Term Loans

Long term loans are those that have a repayment cycle of more than one year. You can acquire a long term loan for five, ten, fifteen, or twenty years depending on the lender’s policies and requisites. They generally have a low interest obligation attached, which makes it lucrative for different people. Generally, long term loans are acquired to pay for mortgages, educational expenses, wedding, home improvement and entrepreneurial startups.

For long term loans, security (of some sort) and collateral are essential. The lender is more likely to conduct an in-depth credit check to verify the applicant’s credit worthiness. The borrower also needs to declare that she/he will be able to make the periodic payments. This is usually done with the help of bank statements and employment compensation records. In case of a default, the repercussions may be extremely severe.

When deciding whether to take out a short term loan or a long term one, you need to figure out the nature of your requirements. At the same time, you need to understand how the loan may actually bite into your earnings and savings. The idea is to balance out the cost of your loan against the utility in order to maximize the returns thereof.

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