There are majorly two categories in which loan are divided. These are:
Long-Term Loans-
Long term loans can be taken over an extended period, i.e. 3 years to 30 years depending on the requirement of the client. Common long-term loans are mortgages, student loan, wedding loans, etc. Obtaining a long-term loan provides a business with capital that it can use to purchase assets or equipment's that can be used to create additional income for the business. This ultimately leads to the financial success of the company.
Along with this, another major difference between secured and unsecured loan is that the interest rate charged on the unsecured loan is way higher as compared to the secured loan, as the lender is at stake in unsecured, while the clients' property is at stake in secured, hence, smaller interest rate.
The basic difference between bank and credit union is that a credit union is a "not-for-profit" union. It does not mean that they are a non-profit organization, they do charge interest but at a smaller rate as compared to banks. They usually provide a loan to the members of the credit union but it can be extended to non-members as and when deemed fit. Banks, on the other hand, allow the amount of money to be borrowed by the customer depending on the credit score. Although taking a loan from banks provides greater flexibility in payments.
In conclusion, long-term loans, if taken care of, can result in a huge financial success. Long-term loans, though spanned over a long period of time, benefit a business financially profoundly if the amount taken is affordable for the client. If you want to take a short term loan then will you be able to pay back the loan amount along with the interest? Weigh the consequences and then go ahead into the field with all you have got!
Short-Term Loan
These are usually one-time loans and can come in handy in case you are not able to get a long term. A person can also take a short-term loan in case of an emergency such as car repairing, medical urgency, or other unexpected bills.
There are some short-term loans available such as:
- Flexible Loans: This type is generally a credit based loan, but up to £25000 only. The interest rate charging against such loans is higher as compared to long-term loans, capitalizing on the length of your loan.
- Payday Loans: Payday loans are like advance cash given while the payment comes from your bank account on your next pay date. These are very popular due to few requirements needed for the approval from the respective company while cash is handed out to the customer in the next 48 hours. These loans generally go up to £2000.
Interest Rate for Short-Term Loans-
Interest rates on short-term loans may differ according to the type of loan selected. Another factor that affects the interest rate is the company that offers the short-term loan.
- For Payday Loans: Short-term payday loans are offered by private lenders at a very high-interest rate that can easily go up to 400% per annum.
- Short-Term Loan from Bank: These short-term loans that are offered by banks come with an interest rate varying from 120% to 270% which is still less than the amount you must pay in payday loans from private lenders.
Does a short-term loan ever make sense for a business?
This question makes one think about everything that has been in the talk so far.
Yes, a short-term loan does make sense for a business, only in some cases. Say you want to open a tiles manufacturing company and so far, you have managed to survive without a long-term loan. But to start manufacturing tiles, you will need to buy equipment, necessary material, and labor at the least. You will need someone to invest in your idea to make it a reality. At this point, if your long-term loan is discarded by the bank due to some reason, instead of going a step back, you can move forward and try out your luck with a short-term loan.
A short-term loan can help you with a capital investment for your start-up to get the process started and start earning. Although you must make sure that the type of short-term loan you select must satisfy your requirements up to a maximum limit because after the investment, you will have to get back to repaying the principal amount with a high-interest rate.
Short-term loans should be preferred only to kick start a business when all other means do not favor your cause. Once this stunt is over, you will have a satisfaction for a lifetime!