Short Term vs Long Term Loan: Which Should You Choose?

Filling out a loan application is only the first step in what could be an extensive process. And before you make consequential financial decisions, you’ll need to have all the facts. 

Namely, not every loan will work for you. Sometimes, only one might. But how do you find out which one?

To help you in this pursuit, we’ve researched the differences between a short term vs long term loan and have compiled all the necessary information. Plus, we’ll also talk about subtypes, pros, and cons. 

Let’s get right into it! 

What Is a Short Term Loan?

As the name suggests, a short term loan is a loan with a shorter repayment period. Usually, this might be somewhere between 6 to 18 months, but you’re bound to find short-term loans with terms outside of this range, up to a maximum of 2 years, albeit more rarely. 

Essentially, the most appealing things about a short-term loan are the interest rates. Evidently, since the repayment timeline is shorter, the amount of interest you’ll accrue shortly after taking it out is higher, so the lender can recoup the costs of providing the loan. But overall, the interest is lower than that of long term loans. 

Additionally, short-term loans give out lower loan amounts conducive to the repayment period, which are deposited in borrowers’ accounts as a lump sum.

Of course, short-term loans serve a different purpose than long-term ones. Some uses include, but are not limited to:

  • Medical emergencies
  • Travel expenses
  • Utility bills 
  • Moving expenses
  • Car repairs
  • Household repairs

Because of the immediate liquidity and fulfilment of urgent financial needs, short-term loans will always be around to provide quick relief. 


Types of Short-Term Loans

Interestingly enough, there is more than one standard type of short term loan. In fact, the most common types of short-term loans are short-term instalment loans and payday loans.

Let’s talk about them in a bit more detail.

Instalment loans

An instalment loan is a type of loan in which you borrow a fixed amount of money. Then, this sum will be deposited in your bank account in instalments that you’d need to pay off periodically on predetermined deadlines

Short-term instalment loans benefit many because of their low and affordable monthly payments, flexible repayment frequencies that allow lenders to adjust the size and terms of your instalments, and fast approval process for fast funding. 

Payday loans

On the other hand, a payday loan is a type of short term loan that has much higher interest rates. Generally, payday lenders only lend smaller amounts, up to $1,500, and require you to pay them back quickly, i.e. in about 14 days or on your next payday, hence the name.

Payday loans can be beneficial because of the fast and easy approvals, no credit checks, and lightning-fast funding in as little as 1 to 2 business days. And yes, no credit check loans are a thing in Canada, so make sure you explore your options.

However, be aware of the costs associated with a payday loan. Apart from APRs of 300% to 650%, you may incur some additional fees. Ultimately, it’s best to save these loans as a last resort. 

Pros and Cons of Short-Term Loans

Now that we’ve covered the basics, let’s talk about the advantages and disadvantages of short-term loans. As we know, a good loan is one that can provide you with relief in the face of grim financial difficulty. 


  • Easy and quick approval
  • Fast funding in as little as a day or two
  • Better rates and conditions when applying with health finances
  • Covers small expenses and financial emergencies
  • Less chance of defaulting 
  • Timely repayments help to build credit score 
  • Credit history may be overlooked


  • High interest rates
  • Borrowers might incur serious debt and credit damage
  • Smaller loan amounts 
  • Less flexible and adjustable loan terms
  • Risk of scam or identity theft
  • Requires frequent repayments
  • No credit card-like revolving credit

Obviously, for every advantage, there’s a disadvantage. Therefore, you must comb through each point and understand what’s most important to you and what you can handle. 

Alternative Options

If you’re not sure whether these short-term loans are the right option for you, you could consider some alternatives, such as:

  • Borrowing from friends or family – although pride might get in the way of you spilling your financial sorrows to people close to you, it may be the best option if you’re looking to avoid raking up interest and sticking to a rigid repayment schedule.
  • Apply for a credit card with a cosigner – the revolving loan you’d get from a credit card lets you borrow money up to a certain limit, which you can use whenever and however you like, while only paying interest on what you’ve borrowed.
  • Apply for a secured personal loan – by putting something of value up as collateral, you can get a lender to approve a loan because they’d be protected, thus gifting you with a lower-than-average APR.jkjkjkjkjkjjkjmkmkmkmnjnjnkmkmkmkmkkmk

Although you still have something to fall back on in case of difficulties, you should always try to make smart and well-thought-out financial decisions. That way, you can avoid falling into debt or one of the many looming loan scams. 

What Is a Long-Term Loan?

So, what about the other end of the seesaw?

Long term loans are loans with repayment periods of more than 2 years. Here, the terms can vary from a few years to as many as 30

What makes a long-term loan attractive to borrowers is that it comes with lower interest rates than short-term loans due to the longer repayment periods. Plus, you’re allowed to borrow much larger amounts of money, sometimes to the tune of $50,000 (or $1.15 million for businesses)

Such significant sums can come in handy in many ways, but people generally use them for:

  • Weddings 
  • Home renovations
  • Buying a home
  • Financing a business
  • Buying a car
  • Debt consolidation

Although these are the most common reasons why someone would choose a long-term loan, this is not a comprehensive list by any means


Types of Long Term Loans

The type of long-term loan you get will usually depend on what you need the money for and how you intend to use it. 

The main types of long term loans are personal loans, business loans, and home loans, which we’ll discuss more thoroughly below. 

Personal loans

A personal loan is a type of long term loan used for specific purchases, such as large-scale home renovations, furniture, or cars. Usually, you use them to consolidate debts with higher interest rates. 

Lenders can lend you up to $50,000 in the form of a personal loan with a term of up to 60 months. Of course, you’ll need to repay all long term loans in instalments. 

To receive a personal loan, you’ll need to prove to the lender that you have a regular income stream, a working bank account, and a permanent address. Thus, expect banks or credit unions to run credit checks during your application.

Check out our list of best personal loans in Canada and apply today!

Small business loans

As the name suggests, a small business loan is a loan used to finance a business. Borrowers can use business loans for a variety of purposes, like starting a business, expanding it, or buying equipment.

Unlike personal loans, financial institutions lend large amounts to businesses, up to a maximum of $1.15 million, which you’ll need to repay in as long as 15 years

However, getting approved for a business loan can be difficult for many companies because you’ll need to provide securities and clean records.  

Home loans

Another commonly sought-after long-term loan is the home loan (or a mortgage), which is typically used to finance the purchase of a new home. So, if you don’t want to join the Home Buyers’ Plan, you should look into home loans and to subsequently build your home equity.

Typically, home loan terms can range from just a few months to 5 years or longer. However, if you haven’t paid the balance at the end of the term, you’ll need to renew the mortgage. The length of time it takes you to pay off the loan is called the amortization period and usually lasts a maximum of 25 years for a down payment of less than 20%. 

Pros and Cons of Long-Term Loans

Unsurprisingly, there are both advantages and disadvantages of long-term loans. Ultimately, whether or not a long-term loan is right for you will depend on your financial needs and the amount you want and can afford to borrow. Here are some pros and cons you should consider:


  • Smaller payments due to the longer repayment period
  • Loan amounts are larger 
  • Loan options for different purchases
  • Tax benefits and deductibles may apply
  • Helps to lock in monthly or annual budget
  • Facilitates debt consolidation
  • Low interest rates


  • Stringent approval process
  • Higher costs due to accruing interest
  • Causes a longer period of debt 
  • Requires good credit score
  • Some require collateral
  • Prepayment may attract more interest
  • Fewer choices for lenders

So, what’ve we deducted?

As it turns out, there is no objectively better option. For some borrowers, a short term loan hits the sweet spot, while for others it might cause more damage, so they stick to long term ones. 


Why is a shorter loan term better?

For some people, a short term loan might be better because it offers immediate liquidity and is useful when you’re in urgent need of funds. Plus, these types of loans generally have quicker and easier approval processes and minimal documentation.

What is considered a short-term loan?

A short term loan is one that needs to be paid off in the near future. Usually, short-term loans must be paid off within 6 months to a year. At most, you’ll have 18 months to make the repayment.

What are the advantages and disadvantages of a short-term versus a longer-term loan?

Short-term loans are great if you’re looking for immediate liquidity, more lenient screening procedures, and cash you can use for emergency situations.

However, they also come with high interest rates, the possibility of falling into debt, and taking a hard hit on your credit.

On the other hand, long term loans provide lower interest rates, larger amounts of money for bigger projects, and can be used to consolidate your other debts. But, they also require regular payments that last for many years, can incur interest fees, and it will take you longer to become debt-free.  


When Angela combined her deep-seated love for linguistics with her growing interest for finance and money management, she struck a gold mine. She’s scoured the internet far and wide for all things related to money and finances, including payments, budgeting and investing. Now she’s eager to share her knowledge and skills with the world, determined to make it a better place. In her free time, she loves to read a good book.

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