One of the most important aspects of getting a loan is knowing how to choose the length of the period you will pay it off. This period is called loan term, and however easy it might sound at first to choose it, many aspects complicate this choice. Some of these include the interest rate, the amount of monthly payment, and ultimately the reason why you need it. Here are some of the most compelling ways to direct you towards you picking how long your loan should be paid off.
One of the most important aspects of getting a loan is knowing how to choose the length of the period you will pay it off. This period is called loan term, and however easy it might sound at first to choose it, many aspects complicate this choice. Some of these include the interest rate, the amount of monthly payment, and ultimately the reason why you need it. Here are some of the most compelling ways to direct you towards you picking how long your loan should be paid off.
Understanding loan terms
A loan term is the length of time it will take you to completely pay off your loan if you’re making regular payments. To put it simply, the loan term is the time it takes to eliminate the debt. Loans themselves can be short-term and long-term, while many also recognize medium-term loans as well. Most of the time, a loan term is fairly easy and obvious to identify. For example, a 10-year fixed-range mortgage has a term of 10 years.
However, loans can last for any length of time that is previously agreed upon by both the lender and the borrower. The loan’s term affects your monthly payments and the total interest costs. If you have a long-term loan, that means you will pay less each month, because the amount you borrowed is divided between more months, so it could be tempting to choose a loan with the longest term available. However, this kind of loan will result in more interest charges over the life of the loan.
What your term length will affect
‘As we have mentioned before, the term of your loan refers to how long you will have to repay it. There are three main things that this choice affects which are:
- Monthly payment (principal and interest)
- Interest rate
- How much interest will be paid throughout the loan
As far as the amount of money you will have to pay every month goes, the shorter the loan term is, the higher the monthly payment will be. This is why it might be tempting to opt for a long-term loan since the monthly payments are much lower. As opposed to monthly payments, the interest rate follows a different path. Shorter-term loans usually have lower interest rates, unlike longer-term rates where the interest rates are sky-high but have a lower monthly payment to cover it up. How much interest will be paid throughout the loan also depends on whether it’s a short-term or a long-term loan. With shorter-term loans, the total cost will be significantly lower.
Short-term loans
Short-term loans, also known as “payday loans” are becoming increasingly popular among small businesses. The reason behind this is that they are usually a common resource for emergency funds. Qualifying for different types of loans for your small business may be a daunting task because it will depend on a few factors that you can easily get tangled up in. Your credit score, time in business, revenues, including how fast you need the money, as well as the amount should guide you towards making the best choice for yourself.
However, if you’re not the best with these kinds of decisions, Nav offers personalized loan offers for your small business, meaning you will have an option by the end of the day. Finding the right option for your loan should not be underestimated, as your small business development will be heavily impacted if you decide to pick one by yourself, without any previous knowledge of the field.
Medium-term loans
Medium-term loans, also called intermediate-term loans generally have a length between one and three years. They are usually used for expenses relating to different sorts of computer systems, and other assets that will last just a few years, as opposed to long-term assets like real estate property. Some of the additional items that are suitable for medium-term loans are any sort of equipment, machinery, and vehicles for different uses. Expenses relating to these items are called capital expenses, and they don’t fall under everyday operating costs.
Some of the advantages of medium-term loans are that they have set monthly or bi-monthly payments which can be a great thing for businesses that want to budget for fixed costs. An additional benefit of this type of loan is that it usually has a fixed interest rate. However, medium-term loans are incredibly hard to qualify for (unless you have good credit or cash flow), and the application process is very long because they require more paperwork than short-term loans. They are still easier to get compared to long-term loans.
Long-term loans
A long-term loan is a type of financing that many companies use, so they could make larger investments in their business. This type of loan is one of the traditional ways of financing, and it provides liquidity to the company with a long-term return in form of periodic instalments. Long-term loans are characteristic in a long time they are paid off, such as several years, or more. Some of the most compelling benefits of this type of loan are the repayment term, and simply the comfort when dealing with the instalments. It’s important to remember that renegotiating the financing conditions is much more feasible, whether it’s in the repayment term or in the interest of the loan itself. However, there are also some very good reasons why long-term loans might not be the best option. One of the reasons why is that it’s customary to have guarantees or guarantees that cover any contingencies that may arise during the period of its validity. In addition to this, the total cost of repayment, given the time it takes, can increase significantly.
We’ve reviewed three different loan terms for you to consider, as well as all their advantages and disadvantages. Short-term, medium-term, and long-term loans all have many advantages but also come with many drawbacks, which is why it’s crucial to dedicate your time to pick the best loan term for yourself or your business. Make sure you read carefully, as your future or the future of your business depends on you to make the right choice.
