Short-term vs long-term loans: How long should you borrow for?

A loan term is simply the period of time over which a loan will be repaid. They can vary in length, which will impact how much is repaid each month, as well as the total amount repaid including interest.

So, for example, a loan of £5,000 could have a term of 12 months, 3 years, or even 10 years. The loan terms offered by the lender can vary based on factors like affordability, credit rating, or the preference of the borrower.

A loan term is a contractual part of the loan agreement. In other words, once you enter the loan contract and receive the money, you will be required to make repayments according to the agreed schedule and loan term.

Along with each of these repayments, you will also be paying interest. As a result of this, the longer your loan term is, the more interest you will pay. But by spreading the debt over a longer period of time, you’re going to be paying less each month.

So, broadly speaking, deciding on a loan term is a question of whether you’d prefer to pay more each month to clear the debt sooner, or pay less each month but pay more in total over a longer period.

Loan term example

Let’s say you’re looking to borrow £10,000 and have the option to borrow over 12 months (1 year), or 60 months (5 years).

Over the loan term of 12 months, the repayments would breakdown something like this:

• Amount borrowed: £10,000
• APR (Annual Percentage Rate, the interest rate): 19.7%
• Total repayable amount: £11,008.30
• Monthly repayment: £917.36
• Amount the loan will cost you: £1,008.30

Whereas, in comparison, a longer loan term of five years would look like this:

• Amount borrowed: £10,000
• APR (Annual Percentage Rate, the interest rate): 19.7%
• Total repayable amount: £15,274.35
• Monthly repayment: £254.57
• Amount the loan will cost you: £5,274.35

As you can see—the longer the loan term is, the less you’re paying each month, but the more you’re paying in total.

What happens at the end of the loan term?

Once you reach the end of a loan term, providing you have kept up with all repayments, the debt will be repaid and the account with the lender will be closed.

Can you repay a loan early?

In most cases, you will have the option to repay your loan early, by making additional repayments on top of the scheduled monthly repayments.

Keep in mind that your loan provider may apply an early repayment charge, so it’s worth checking the terms of your loan agreement.

While it might seem like a good idea to take out a long-term loan for smaller monthly repayments and then pay off the debt early—it may work out just as expensive, as a result of the early repayment charges.

In this section, we’ll take a look at short-term borrowing in more detail.

What is a short-term loan?

A short-term loan typically refers to a loan of up to 12 months, but can sometimes include loans up to 18 months as well.

What are short-term loans used for?

Short-term loans are, by nature, more suitable for smaller amounts over shorter periods.

Because of this, they’re often used for more temporary financial needs—like getting access to additional funds to cover a purchase, an unexpected expense like car repairs, or to make ends meet.

Short-term loan advantages

• Quick access to cash, with plenty of options for how you’d like to borrow
• You will pay less interest with a short-term loan, even if the rates are higher, meaning the total amount you repay on top of the original amount borrowed will be lower
• You won’t be tied to making repayments for a number of years

Short-term loan disadvantages

• Your monthly repayments will be higher, as you are spreading the debt over fewer months and many short-term loans will have a higher interest rate
• You might be limited in the amount you can borrow, depending on your circumstances
• Missing repayments with any type of loan can damage your credit score, so you should only borrow what you can afford to repay over a realistic term

Are payday loans a type of short-term loan?

A payday loan is a short-term loan that has been specifically designed to be repaid within a few weeks, to help make ends meet before the next payday. They often have very high interest rates and can cause large amounts of debt if not repaid on time.

Payday loans should be treated with caution and avoided wherever possible. In almost all cases, spreading the debt out over a few months—or using an alternative, like an overdraft or credit card—will be a lower-risk way to cover expenses.

In this section, we’ll cover the key things to know when it comes to long-term loans.

What is a long-term loan?

Long-term loans are a form of borrowing that allows for the debt to be repaid over a longer period of time. By definition, a long-term loan will typically have a loan term of at least one year, but can have terms as long as 30 years.

What are long-term loans used for?

Generally speaking, long-term loans will be used for large purchases or other significant financial commitments, like home renovations or paying for a wedding.

If you were looking to buy a new or used car, for example, a long-term loan would allow you to spread the cost over a series of years and have full legal ownership of the car from the beginning, which isn’t the case with car finance.

In some cases, a long-term loan might be preferable for debt consolidation, combining multiple separate debts into a single, smaller monthly repayment over a longer period of time. Though it’s worth noting that, by consolidating debt and extending the loan term, you may pay more overall in interest once the debt is fully repaid, than you would if you were to repay the original debts.

Long-term loan advantages

• You’ll be paying less each month, as you’re spreading the debt over a longer period of time
• You might be offered a lower interest rate (though you will be paying interest for longer, which may make it more expensive in total)
• You will generally be able to borrow more, as the monthly payments will be more affordable

Long-term loan disadvantages

• You’ll be paying more overall than you would with a shorter-term loan, despite lower monthly repayments and typically lower interest rates, because you will be paying interest each month over a longer period
• You’ll be committing to monthly repayments for a longer period of time, potentially for several years—so it’s important to consider this carefully before making a decision
• If you are borrowing a large amount, it will likely be with a secured homeowner loan—your home may be repossessed if you do not keep up with mortgage or secured loan repayments

There are two common types of loan: unsecured and secured.

Unsecured loan terms

Unsecured loans, also known as personal loans, do not require the debt to be tied to any other assets, like your home, and instead base their eligibility on factors like your credit history.

As a result of this, unsecured personal loans typically have lower borrowing amounts and shorter loan terms. A typical unsecured loan term might be one to seven years, but in some cases they can be just a few months as well.

Secured loan terms

With a secured loan, otherwise known as a homeowner loan, the debt is tied to your property as collateral, allowing you to borrow more with less reliance on factors like your credit rating.

Secured homeowner loans are typically used for borrowing larger amounts over longer periods, with terms anywhere from one to 30 years. In some cases, lenders may have a minimum secured loan term of three or five years.

Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it.

If you’re thinking about borrowing short term, but don’t necessarily want a personal loan or a higher-risk solution like a payday loan, you can also consider the below options.

Credit card

If you think you only want to borrow money for a very short amount of time, it might be worth considering a credit card—in particular, a 0% purchase card. These are cards with a 0% interest period, allowing you to make purchases and repay the debt without building up any interest.

Once the 0% period ends however, the card’s usual rate will apply and you’ll start getting charged interest—so try to actively pay off the balance when you can. The term lengths for 0% purchase periods vary a lot, for instance from 3 months to 18 months, so it helps to shop around and find a card that suits your needs.

Overdraft

You can also consider using an arranged overdraft if you have one. An arranged overdraft is an amount of money, agreed with your bank, that your account can be in debt, or “overdrawn”.

It’s worth noting that you will be charged interest for any money in an arranged overdraft, based on a standard rate set by your bank.

If you enter an unarranged overdraft, which hasn’t been approved by your bank, you might be blocked from making additional payments from the account until the balance is resolved. This may also appear on your credit report as an unarranged overdraft usage.

Before deciding on a loan, whether short or long-term, it’s important to ask yourself a few things:

Can you afford the monthly repayments for the duration of the loan term?

It’s important that a loan is affordable both now and in the future. If you opt for a homeowner loan or mortgage, a qualified adviser will look at your finances to make sure you can definitely afford to take out the loan and will offer you advice on your best options. 

Have you found the right lender?

Free soft search tools like our loan eligibility checker can help you to find a suitable lender for your needs, without impacting your credit score.

Are you aware of the interest rates and any other fees?

Be sure to check the full terms of your loan agreement before committing to anything. It may be that charges will be applied for early repayment, or missed repayments.