Personal loans have become the most sought-after credit option for individuals seeking to finance a multitude of their unique needs. These instant loans are in demand as they are disbursed quickly with minimum documentation. Depending on the credit history, employment status and other eligibility criteria, several options are available for borrowers to choose personal loans based on interest rates that best suit their needs.
These personal loans are also broadly divided into long-term and short-term loans, based on the loan tenure. In short-term personal loans, the repayment tenure is two years or less, whereas, in long-term personal loans, the repayment tenure could range anywhere between 2 and 12 years. Short-term loans are ideal to borrow small amounts for immediate needs, although the interest rates may be high. A borrower needs to choose the tenure based on his/her financial capacity and needs. In these unpredictable times, we often encounter immediate needs, where quick loans provide a temporary safety net for scores of borrowers. Let us look at the broad differences between short-term and long-term personal loans and the benefits and drawbacks of both that can help borrowers choose the tenure that best suits their needs and convenience.
Benefits of Short Term Personal Loans
No Collateral Needed
Short-term personal loans are mostly unsecured. A borrower does not have to pledge security or collateral to secure this loan. The short term loan is beneficial if you are a young or a first-term borrower who does not have any security to pledge. In other words, to secure this loan, you do not have to sell your car, home or other assets in exchange for the loan. The short term loan is also the reason why interest rates are higher in such unsecured loans.
One can avail of short term loans for a multitude of reasons. You can utilise short-term loans for marriage expenses, medical emergencies, foreign holidays, home renovations or buying furniture or electronics etc. Essentially, one can take short term loan for several purposes that are immediate.
These loans are sanctioned and disbursed quickly as the need is immediate, and there are no collaterals to be pledged. These are easy loans that require the least amount of documentation, because of which the disbursal also happens quickly.
Short-term personal loans are hassle-free, and apart from primary ID proof and bank account history, lenders don’t seek complex documents. Since the lender doesn’t have to fetch a multitude of documents from different departments to prove his repayment or eligibility, the whole process becomes hassle-free and gets sanctioned without many questions.
You won’t have to do multiple rounds of banks and other financial institutions to secure a short-term personal loan. More often, this can be availed with just a few clicks online once you meet the primary eligibility criterion. With online apps and virtual help centres, accessing these short-term personal loans has become easier than before.
Also Check: Personal Loan Interest Rates in 2021
Drawbacks of Short Term Personal Loans
High Interest Rate
Although you may close the loan within a short duration, the interest rate is higher in these small loans as the risk for the lender is high, mainly because these short-term personal loans will be available without security and collateral. A significant amount of money will be spent from your account for the repayment of these loans.
Short-term loans help meet immediate financial requirements; therefore, the borrower may take a loan to pay off their immediate financial commitments. In this process, it is possible that he/she may not be able to repay the bank fully due to the high-interest rates or post repayment of the loan and will not be left with much. While short-term loans look like a quick fix, they may have repercussions later and put the person in debt.
Benefits of Long Term Personal Loans
Reduced Interest Rate
Interest rates on personal loans are generally higher than other home or car loans. The longer the repayment tenure is, the more flexible the interest rate will be. Therefore, a long-term personal loan, for example, 6 years will come with a better interest rate than a short-term personal loan of 2 years.
Reduced Repayment Burden
Since repayment of long-term personal loans happens over a more extended period, instalments are spaced out well, and the monthly repayment is low. Therefore, long-term personal loans will reduce the repayment burden to a large extent compared to short-term personal loans. Several personal loan EMI calculator apps are available online that can help you choose a tenure that suits your monthly EMI payments.
Improves Credit Score
A credit score of 750 or above is ideal in the eyes of the lender. Availing of a long-term personal loan is suitable for your credit score. Since this involves paying EMIs over a lengthy period, it showcases your financial discipline and diligence and the longer this diligence is displayed, the better the credit score gets. Therefore, a lengthy and responsible repayment tenure can help boost the credit score of the borrower.
More Eligible for a Personal Loan
While eligibility criteria for personal loan online are basic and minimal, choosing a long-term personal loan works better to improve your eligibility. Because when you choose a longer tenure for repayment, the EMIs are lower, which makes the sanctioning easier as the lenders feel that you have taken the loans for a longer term. Defaulting on repayment is lower than short-term loans, where repayment has to be done quicker and comes with higher EMIs.
Helps Meet Long Term Goals
Long-term personal loans are perfect to realise long-term financial goals. While short-term personal loans are availed for immediate financial needs, it is better to go for long-term loans if you are meeting some important life goals that span over a period of time. For example, a child’s overseas education or a long-term surgery can be planned better with long-term personal loans.
Eligible for Top Up Loans
Since the repayment burden is lower and EMIs are comparatively less, you could be more eligible for another loan – once you have finished a specific loan tenure – say 12 EMIs. When the association with the lenders is longer, the trust factor improves, and you become eligible for more offers and loans.
Drawbacks of Long Term Personal Loans
Debt Bearer for a Longer Period
It is evident that the longer the loan tenure is, the longer you will be in debt. While in short-term personal loans, you can quickly finish off the repayments, and the long-term ones will take time, and therefore, you will require to be financially disciplined over an extended period of time.
Ineligible for More Loans
While you may be eligible for top-up loans after completing a fixed repayment tenure, you may not qualify for other loans at any given period as you already have an existing loan for an extended period. It may decrease your chances of securing another loan, but that also depends on your income and repayment amount etc.
While pre-payment of loans can considerably reduce your overall EMI and interest, sometimes it may lead to a penalty. So if you decide to repay the outstanding amount of the long-term personal loan in advance, check whether a hefty fine will be levied by the lender.
List of Top 5 Banks/NBFCs Offering Short Term and Long Term Personal Loans
|Bank||Interest Rate||Tenure||Loan Amount||Processing Fee|
|SBI||Starting from 11%||6 to 71 months||Upto Rs. 20 lakhs||Upto 2% of loan amount plus GST|
|HDFC Bank||15.50% to 21.50%||12 to 60 months||Upto Rs. 40 lakhs||Upto 2.50% of the loan amount plus GST|
|ICICI Bank||11.25% to 22.00%||12 to 60 months||Upto Rs. 20 lakhs||Upto 2.25% of loan amount plus GST|
|Axis Bank||16% to 24%||12 to 60 months||Upto Rs. 15 lakhs||Upto 2% of loan amount plus GST|
|Bajaj Finserv||Starting from 12.99%||12 to 60 months||Upto Rs. 25 lakhs||Up to 3.99% of the loan amount plus GST|
Factors to Consider While Choosing Short Term or Long Term Personal Loan Tenure
A few factors should be taken into consideration before selecting the term of your personal loan. Whether you should go for long-term or short-term personal loans depends a lot on your purpose, income, repayment capacity etc. Let’s look at the critical factors to be taken into account while choosing a tenure
Is the reason for availing of the loan urgent and immediate? Then, go for a short-term personal loan. For example, an urgent medical need, a quick purchase of a household item, etc., might require fast money and can be repaid quicker. Whereas if the goals are long-term, then go for a personal loan that is long-term. For example, if you are aiming to pay for a long-term medical need or to finance your commercial venture, then repayment may also take time. So under these circumstances, a long-term personal loan may work best.
Current and Future Plans
Also, take into consideration the repayment plans. You should ask questions such as – Will I be able to repay in this fixed tenure? Will this EMI amount work, can I live comfortably after paying off this EMI, Will I need another loan in this tenure? Will there be other expenses that should be taken into account? These questions will help you figure out which term works best for you as per your income, expenses, future plans and other financial obligations.
Debt to Income Ratio
Whatever the tenure is, make sure to have a low debt to income ratio. A short-term personal loan may affect this ratio, and you may have more obligations in that short period because of the high EMI. This may, in turn, affect your credit score. Managing the EMIs every month is essential, and decide on the tenure of the loan is only based on this ratio.
The interest rates vary as per the tenure you choose. A short time will mean a higher interest rate, and a long term will mean a low-interest rate and the repayment spaced out over an extensive period of time. Once the loan amount has been decided, make sure to use an EMI calculator and arrive at a tenure that suits your interest outgo.
How to Apply for Short Term and Long Term Personal Loans?
The process for application for both short-term and long-term personal loans are similar.
– Once you have narrowed down on the bank, interest rate and repayment tenure, visit the nearest branch or visit the bank online (In the short term, online application is more than enough)
– If you are in the bank’s app or its official website, read the terms and conditions and apply for the loan online
– Fill in the loan amount and tenure and understand the interest rate for that tenure
– Fill in your personal details, income, ID etc
– Wait for the loan amount to be disbursed
The eligibility criteria for both short and long-term personal loans do not differ.
– Resident of India
– Salaried or self-employed
– At least 21 years of age
– A minimum salary/income (This could be anywhere between Rs10,000 to Rs25,000 depending on the lender)
– Valid government ID and work proof
Depending on the loan tenure, some banks may want to see the credit score in long-term personal loans. Besides, while availing of long-term personal loans, documentation could be a bit more comprehensive than in short-term personal loans. Broadly, these are the documents sought by lenders, depending on the tenure.
– ID proof (PAN card, Aadhar card, voter ID etc.)
– Age proof (Birth certificate, driving license, Aadhar card)
– Bank statement of the last six months
– Income proof (salary slips, income tax declaration etc.)
– Credit history (This is sought mainly for long-term personal loans). It includes loan history, credit card details, repayment records etc
While choosing a personal loan, it is crucial to decide the tenure of repayment. Both short-term and long-term personal loans have a set of benefits and drawbacks, and the decision should entirely be based on your purpose and repayment capacity. While most banks offer both short-term and long-term personal loans, the tenures being offered have to be carefully weighed and assessed so that you secure a personal loan tailored to your current financial needs and repayment capabilities.