Loans are an amount of money, considered as debt, provided by an institution to another party in exchange for an interest that is payable up and above the principal amount. Loans can be classified as secured and unsecured loans. Secured loans are loans where the borrower pledges an asset, usually a property, known as a collateral. Unsecured loans, on the other hand, requires no collateral against the borrower’s assets and usually have high interest rates.
Long Term Loans
Long term loans are generally understood to be loans that are payable for a period of more than a year. Financial institutions such as banks and credit unions are usually the ones that offer these types of loans. These are usually secured loans that are close-ended. The loans are usually worded in such a way that the assets used to collateralize the loan cannot be utilized for other loans. An example of this is, again, the mortgage in your home. Businesses can also secure these loans for expansion, equipment and property acquisition.
Short Term Loans
Short term loans, on the other hand, are usually personal loans that can be used for any purpose and payable within a short, specific period of time. Usually, short-term loans incur a high rate of interest and can easily pile up if not attended to in a timely manner. For personal loans, some people need loans to pay for their rent and with food being so expensive, they may even need short term loans to pay for the groceries. For businesses, short term loans can help in their immediate financial needs such as payables, payrolls and the likes. In this case, it is referred to as bridging loans. Individuals can also avail of short term loans for their needs.
An example of a short-term loan for an individual is a payday loan or paycheck loan. Here, if a person needs to have money for an emergency. He goes to a place that offers payday loans and borrows the amount that he needs. He would then issue a check that will correspond to the amount that he borrowed, plus the interest, usually at around $15 to $30 for every hundred, and he has to fund that check within the next 14 days. Hence, the term payday loan.
If he fails to pay on the appointed date, then the loan is rolled over until the next payday, with the corresponding interests compounded thereto. In this scenario the borrower can quickly find himself paying much more than the principal amount in such a short time. It is strongly advised that borrowers be aware of the risks that are involved when availing of this type of loan. Since the practices can be predatory, this industry is strictly regulated by the government.