Short-term loan or a long-term loan. Which one is a better option?

 

 

In this article, we will explain the difference between unsecured short-term and unsecured long-term loans. Learn more about the benefits and downsides of each. The advantage of both these unsecured loan types is that you don't need collateral. 
We won't be, looking at secured loans like vehicle and asset finance or pawn transactions. 

Life choices can be up in the air if you don't have the necessary funding or savings when the unforeseeable happens. Sometimes your best option is to consider taking out a loan. In light of this regrettable circumstance, you will have to decide whether to take out a short-term loan or vice-versa. Below we will look at both these options in more detail.

 

 

What is a unsecured short-term loan in South Africa?

According to the NCA (National Credit Act), these loans are short-term or payday credit transactions. These include loans up to R8000,  repayable within six(6) months with interest and cost.

Short-term loans are for people who need fast cash, your car broke down, or maybe some unexpected expense that you will be able to resolve, in a short time, but you need to take care of the problem today.

Lenders that provide short-term loans will consider your credit record and affordability. If you qualify, you can have one of these loans in your bank account within hours.  Read more about short-term loans.

 

The benefits of an unsecured short-term loan

• There is no long-term commitment - Loan terms never exceed six(6) months.
• Can help you out of a tight spot now.
• You can be out of debt in a few short weeks or months. 
• No long-term financial obligation for several years.
• You can choose from many providers - many credit providers, banks, and financial institutions offer short-term credit.
• You don't need a perfect credit score - Lenders will consider a less-than-perfect credit rating.
• The total cost will be lower -Even though these loans are more expensive, interest and fees will only accumulate for a short period. The interest rate for short-term loans is in the region of 36% - 60% per year.
• You get fast access to cash - Most credit providers can approve or deny a loan within hours. Funds will be in your account within hours.

 

The downside of short-term loans

• Loan amounts are smaller - Only up to R8000
• Higher interest rates
• They can lead to further debt problems if you miss your repayments

 

What is a unsecured long-term loan in South Africa?

These loans are longer-term unsecured credit transactions. These include loans between R5000 and R300,000, repayable monthly over 12 to 84 months. 

Long-term loans are for people who want to purchase a big-ticket item or are interested in consolidating their debt into one affordable installment.

Many, credit providers offer long-term loans, including banks. As with short-term loans - your credit profile and affordability will be considered to ensure, that you can afford the repayment.

 

The benefits of a long-term loan

• You borrow more than short-term loans - Our lending partners do loans up to R300,000
• Lower interest rates - Usually lower than for short-term loans.
• Can help you achieve your goal faster
• The interest rates are up to 15% - 29% per year depending on your credit profile
• The repayment term is longer - More affordable installments 
• Loan available within one(1) to two(2) business days.
• You can choose from many providers, but their criteria can be strict.

 

The downside of long-term loans

• You are committed to credit repayments for a longer term
• The total cost that you repay can be very high - long repayment terms will increase the total amount you have to pay
• It will take longer to get access to the loan - Lenders want to be sure of your ability to repay
• They are not flexible - you will have a monthly debt repayment for several years

 

Short-term vs. long-term: what is the outcome?

In conclusion: There are times when short-term credit can be more beneficial than long-term credit and vice-versa. Short-term loans are more expensive, but cheaper in the long run if you just have a short-term complication to solve. 

Then again long-term credit is cheaper and can have an affordable monthly installment, but those installments will be there for years, pushing up the total repayment.