Determining the simple interest on a loan is a straightforward process. All you need to do is multiply the principal amount of the loan by the interest rate and the term. Simple interest is typically used for short-term or automobile loans, although some mortgages may also use this calculation method. Alternatively, you can use an EMI calculator to determine the simple interest on your loan.
With digitization, lenders offer short term loan and long term loan both online and offline modes to avail of loans. Applying online can reduce processing time significantly, as it requires visiting the lender’s website and submitting the necessary documents. On the other hand, seeing the nearest branch of the lender and meeting the concerned officer in charge of loans is required for offline applications.
Loan tenure meaning the duration between the loan disbursal and the final payment of the EMI. Suppose your loan was disbursed on January 1st, 2022, and you made the last EMI payment on January 1st, 2025, your loan tenure would be considered three years.
Yes, it is possible to switch from a short term loan period to a long-term loan. However, the process and feasibility of the short term long term switch depend on various factors, including the terms and conditions of your current loan, the lender's policies, and your creditworthiness.
Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.
16 JUNE, 2021
What is a Short term Loan?
A Short Term Loan is a financing option designed to cater to the immediate financial needs of businesses. It provides companies with the necessary funds to meet their short-term financial needs, such as operational costs, working capital requirements, and expansion plans. The loan tenure for Short Term Loans usually lasts three to five years and requires the borrower to repay the loan amount and interest before the loan tenure ends.
Advantages of Short Term Loans
Disadvantages Short Term Loans
What is a Long term Loan?
If you don’t know what is Long Term loan is, Long term loans are ideal for individuals seeking extended repayment periods that align with their financial capabilities. These loans are commonly used for personal purposes, such as weddings, medical emergencies, and debt consolidation, and for more significant investments like homes or businesses.
The loan tenure means the period of a long term loan, which can span from 5 to 25 years. Consequently, long term loans offer numerous benefits, including access to more significant loan amounts and lower monthly installments, making them a favorable option for borrowers seeking manageable repayment plans.
Advantages of Long Term Loans
Disadvantages of Long Term Loans
H3: Situations where Long Term Loans can be useful
Long-term loans can be helpful in various situations where a borrower needs extended time to repay the loan amount. Education loans are an example where students can take loans for courses like engineering or medicine, which can be repaid over 30 years. Home loans are another advantageous long-term loan for individuals who need a substantial amount of money to buy a home and require a longer repayment tenure. Similarly, car loans and personal loans can also be taken for a more extended repayment period, allowing borrowers to pay back the loan amount in smaller installments over time.
Differences Between Short Term Loan vs Long Term Loan
Long Term loan
Short Term Loan
Long-term loans typically have a repayment tenure that extends beyond five years, with terms of up to 30 years.
Short-term loans typically have a repayment tenure that is usually five years or below.
The majority of home loans are long-term loans that require collateral. The borrower cannot fully own the property used as collateral until the loan is fully paid off.
Short-term loans do not always need collateral. When the collateral is required, the asset can be uncollateralized quickly.
Long-term loans have a more extended repayment period and smaller monthly payments spread over several years, resulting in lower interest rates than short-term loans.
Lenders may charge you higher interest rates to get any value for a short-term loan.
The EMIs are usually lower in long-term loans.
The EMIs are higher to recover the amount in a short period.
Long-term loans may have a longer processing time as banks or lenders usually thoroughly evaluate a borrower's creditworthiness and repayment capability.
Short-term loans are typically dispersed quickly because they involve smaller loan amounts and require minimal documentation.
Factors to Consider when choosing between Short Term & Long Term Loan
Choosing the suitable home loan tenure is crucial as it can impact your monthly EMI outgo and total interest pay-out. Your monthly income, age, rate of interest, and objective of purchase determine whether to opt for a short term and long term home loan. While a long-term loan may mean lower EMIs, a short-term loan may help you save on interest in the long run. Assess your needs and financial situation before making a decision.
Choosing Between Short Term and Long Term Loans
The decision between a short-term and a long term loan period depends on individual circumstances and repayment ability. Borrowers who prefer lower monthly installments and do not want to overburden themselves financially should opt for a long-term loan. However, those who want a quick disbursal and can bear a high-interest rate can choose a short-term loan.
Before going for either short term and long term financing, It is also essential to consider the borrower's age, as those nearing retirement age may face difficulty in availing of a long-term loan. Lenders may view such cases as high-risk, and applicants in their 40s or 50s may meet eligibility constraints for loans with longer repayment tenures.
Considering these points, you can understand the risk involved in opting for a long-term and short-term home loan. Want to get over the burden of paying EMIs sooner? Choose a short-term home loan. However, be ready to pay higher EMIs although, with a reduced overall interest amount. On the other hand, go for a long-term home loan if you cannot pay higher EMIs. While the interest paid will increase, you can pay smaller EMIs.
To sum it up, you must choose a home loan tenure that suits your repayment capacity! A home loan is a secured loan, wherein the purchased property acts as collateral. Therefore, in case you default on your home loan, the lender may seize your property to recover the loss incurred. Opting for a tenure that makes your EMIs affordable will reduce the chances of default. You can also get an estimate of your home loan EMI with the help of an online EMI calculator.
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