When a financial need arises, you may initially look at your personal accounts to determine if you can afford to meet your need with cash on hand. If cash is not available, your next step may be to consider getting a loan. There are a wide range of loan programs available for you to consider. This includes everything from auto title loans and payday loans to unsecured bank loans, home equity loans and more. The primary difference between the many loan options is the term length.
A short-term loan is usually defined as a loan with a term length of three years or less, and a long-term loan has a term length greater than three years. Some long-term loans have a term length of 20 to 30 years. Because there are so many variations with regards to loan terms, you need to determine which term length is most well-suited for your needs before you decide which loan program to move forward with.
Understanding Your Financial Needs
You may not think that the loan term has any impact on your financial needs, but this is not the case. Many short-term loans have a relatively low loan amount. For example, a payday loan may provide you with a few thousand dollars or less while a home equity loan can give you tens of thousands of dollars or more. Take time to calculate the total loan funds that are needed so that you can make a more informed decision about which loan term type to take a closer look at.
Analyzing the Cost of the Loans
Short-term loans usually have a higher interest rate than long-term loans. This is even usually true when you are debating between a three-year or a five-year auto loan or a 20-year versus a 30-year mortgage loan. Title loans in North Charleston as well as payday loans may have relatively high interest rates, so you may think that these loans are more expensive than other options.
However, the total loan costs take into account all interest charges as well as loan fees. Because long-term loans require dozens or even hundreds of months of payments, the interest charges can accrue to a very large amount. In many cases, the total cost of a long-term loan is higher than the cost of a short-term loan. However, you should use an online loan cost calculator to more accurately compare the cost of the loans that you are thinking about applying for.
Determining the Impact on Your Budget
Another important factor to review before you apply for a loan is the impact that the loan will have on your budget. A monthly payment is calculated using terms for the length of the loan, the loan amount and the interest rate. When the interest rate and loan amount are held constant, a loan with a longer loan term will have more affordable loan payments. However, you will have the burden of a loan payment on your monthly budget for an extended period of time.
If you are trying to decide on a term length for the loan that you need, a smart idea is to use a loan calculator to compare multiple options. Keep in mind how factors like the loan amount and interest rate combine with the term length to affect monthly payments and the total loan costs.