Loans can either be short-term or long-term. It depends on how long you have to pay back the loan – this is known as the loan’s tenure. Short-term loans in Singapore have tenures of 1 to 5 years, while long-term loans have tenures of 10 to 30 years. You can usually find both types in any licensed money lender.
Having trouble deciding which one to take out? Consider these four factors to find out whether a short-term or a long-term loan is best for you.
Interest rates
Long-term loans usually have lower interest rates, but they are not overall cheaper than short-term loans with higher interest rates. This is because interest rates are presented per annum (p.a.). So the more years you must pay off a loan, the more interest to be paid. So despite short-term loans’ you may end up paying less in total.
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Monthly repayment amounts
For short term loans, monthly repayments tend to be higher. If you have the budget for this, it won’t be a problem. But if the monthly repayments of a short term loan proves a little too much, it might lead you to financial trouble.
In this case, taking out a loan with a longer tenure is a better idea. It might cost you more overall, but at least the monthly repayments are more affordable. It’s better to pay more over the lifetime of the loan than accumulate fines for late or missed payments. Moreover, late and missed payments will negatively affect your credit score.
Flexibility
Short term loans tend to be stricter with repayment terms and deadlines. They may also impose heftier penalties for late or missed payments. Longer term loans, on the other hand, tend to be more flexible in their terms. You can more easily negotiate with your lender in case you find yourself in a tight spot in some months.
Overall cost
As mentioned earlier, longer term loans may cost more overall due to more interest payments. The monthly repayments may be less, so you might think long term loans are more affordable. While this is true, consider the overall cost of the loan as well.
If you’re considering a long term loan, compare its overall cost with a similar loan with a shorter tenure. If the short term loan costs less overall, and you can afford the monthly repayments, then go for the short term loan and save a good deal of money.
But if you don’t think you can consistently make the monthly repayments of a short term loan, don’t risk it. Take out a long term loan instead. It’s not worth the risk of a lower credit score and being slapped with fines for late or missed payments.
Conclusion
Both long-term and short-term loans have their pros and cons. Consider each one before you decide which loan to take out. Be wise; choose the loan that best fits your financial situation and your capability to pay it back.
