06.12.2022
Many people are unaware of the impact interest can have on a loan and its repayment. This is not surprising given that not all people are mathematically gifted to do the necessary calculations to determine the best possible loan for a person’s needs.
Each type of credit has its own characteristics and the need for credit is as varied as the people who need it. Therefore, each loan should be tailored to a specific or individual need. Depending on your needs, the type of loan offered can be divided into short-term or long-term loans depending on the repayment period. Choosing one of these two loans can determine the percentage of interest the borrower has to pay.
Below is a brief evaluation of these loans and some commonly associated interest rate requirements.
Short term loan
In the financial world it often happens that the smaller the amount made available for a loan, the shorter the time allowed to repay the loan. In short it is a short term loan that is, a loan agreement that must be repaid within a relatively short period of time.
This feature also affects the type of interest specified in the loan terms. The general trend in lending rates includes the following components:
1. Short-term loans usually have a lower but variable interest rate because the loan is generally expected to be repaid within a year. Also, short-term loans often require fewer loans and therefore carry less risk.
2. Short-term loans sometimes offer flexible repayment terms where the installments can vary and are not fixed.
Long term loan
This type of loan, as the name suggests, is a loan that has to be repaid over a longer period of time, usually more than a year. While both short-term and long-term loans require a creditworthiness check of the borrower, long-term loans have stricter lending requirements.
Long-term loans usually have a higher interest rate, mainly due to two things:
1. Longer-term loans tend to be larger amounts that are riskier for lenders, so interest rates are higher to cushion any losses from potential future defaults.
2. Long-term interest rates are usually locked in, so any future interest rate increases will not benefit the lender and will negatively affect the borrower.
summary
Both long-term and short-term loans have an interest rate that must be paid along with the principal. Short term loans tend to carry a lower interest rate due to their relatively short repayment term.
Typically, the longer it takes to repay a loan, the larger the bond and the higher the interest rate. However, this is not a rule as different loan providers offer different terms which may conflict with the ones mentioned here.
