Short Or Long Term Loan: Which Is Better For Me?

Financial Advice


By: FCU Team

Any loan will have four components: the loan amount, the presence of security or collateral, the interest rate (also known as finance charge), and the life of the loan, known as the term.

Are you looking for a borrowing option with a low monthly payment, or would you rather have a higher monthly payment but save more over the life of the loan? This article will focus on the duration of the loan and will highlight the differences between a short term or a long term loan.

How Does the Loan Term Affect Your Payment?

This is how a loan's term would impact how much you would pay in interest as well as your monthly payment. These calculations are based on a $10,000 loan with a 5.00% APR. 

Loan term Monthly repayment Total interest Total repayment
12-Months $875.00 $500.00 $10,500.00
36-Months $299.71 $789.52 $10,789.52
60-Months $188.71 $1,322.74 $11,322.74

Calculate your own payment by using this loan calculator

Long Term Loan:

A long term loan is defined as a loan with the payment period of at least 5 years, or 60-months.

Pros – 60-month and 72-month loans tend to have a lower annual percentage rate or “APR” than short term loans because the principle of the loan is paid back over a much longer period of time. Generally, your overall payment each month is reduced the longer the term of the loan. You can spend less money each month, and if you’re trying to fit a purchase into a tight budget, being able to minimize your monthly payments is a huge benefit.

Cons –  In the long-run, you will probably spend more money by taking a long-term loan, and you will definitely make more payments. There is an easy workaround to this by paying off your debt in advance of the payment period. In other words, clearing your debt before the end of the term. 

Short Term Loan:

Pros – A short term loan can give you more flexibility since your debt will be paid off sooner. The requirements to qualify for these loans are also generally less strict, which means you have a better chance of being approved. If your credit score isn’t so great, you still may be able to get approved for a loan with a short repayment period and a smaller principal balance.

Cons – Short term loans also tend to have higher interest rates. Higher interest rates and a shorter repayment period mean that your monthly payments are almost sure to be higher than those of a long-term loan. What might be considered a pro on one hand, could be a con on the other. Short term loans typically have much smaller loan amounts, which means they can be paid off sooner, but if you need a large infusion of cash then a short term loan may not be on the table.

Which Loan Option Should I Choose?

The type of loan you choose should depend on which option best fits into your budget and your long-term plans. A longer loan means spending less money each month, but spending more overall. A short loan means a heftier monthly payment. Your credit may also impact your options by affecting the rates and loan types offered to you.