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

Interest rates and APRs are a great basis for comparing loan offers, however, there is another factor that’s just as important—the loan term.

Understanding the short term vs long term loan difference and their respective benefits and drawbacks will help you make the right decision when looking for financing. 

Short Term vs Long Term Loan: Differences

Before we get to the most notable differences between the two, let’s cover the basics. 

What is a short term loan?

As the name suggests, a short term loan is a type of financing that has a shorter repayment period, usually ranging from a few months to one year. Sometimes you might be able to get a short-term loan stretching for 18 months or two years, but anything longer than that is considered a medium or long-term loan. 

Since short-term loans come with fewer repayments and potentially higher interest rates, you will pay more each month. However, there is less time for interest to accumulate on the loan, which means you will end up paying less overall. 

What is a long term loan?

Long term loans start from one year and can span up to 25, depending on the purpose of the loan. Since the loan term is longer, you can borrow a larger sum of money which can then be used to finance major purchases, such as a house or a car. 

The biggest disadvantage of long term loans is that they cost more over the life of the loan since you pay interest and fees for a longer period of time than you would with a shorter loan.

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. 

Key differences 

1. Overall cost of the loan 

As mentioned above, short-term loans cost less in the long run. 

To better illustrate, here is a hypothetical example of what a $15,000 loan repayment looks like over one and five years. 

APR Monthly Repayment Total interest Total repayment
One year amortization 6% $1,291 $491.96 $15,429
Five-year amortization 6% $290 $2,399.52 $17,400

Judging from the table, you will pay almost $2,000 less overall on a short term loan, i.e. the total repayment of a one-year loan can be five times lower than that of a 5-year loan. 

2. Monthly repayments 

At the same time, your monthly repayments on a long-term loan are $1,000 lower. Paying less every month makes the loan easier to manage and won’t affect your budget as much. Plus, you have more cash at your disposal which you can invest and then use the returns (if you get any) to pay off the loan. 

3. Interest rates 

A short-term loan comes with higher interest rates than three- or five-year loans. For instance, APRs on a payday loan can go as high as 780%, whereas longer loans are available with interest ranging from 5% to 6%. 

Still, you could end up saving money on interest with a shorter loan even if the rate is higher. 

4. Purpose of the loan

Short-term loans are typically used to cover unplanned costs such as medical emergencies, travel expenses and home repairs. Long term loans, on the other hand, are used to pay for bigger purchases such as cars or houses, as well by borrowers who want to consolidate their debt

5. Eligibility criteria 

Lenders specializing in payday and other personal loan alternatives are known to accept borrowers with bad credit or no credit history. Keep in mind that interest rates will be higher and the loan term could be very short (some payday loans need to be repaid in two weeks). 

Mortgage and car loan lenders, however, have stricter standards and typically want borrowers with a good credit score or steady income. They also require some kind of collateral to approve you for a loan, whereas most short-term loans are unsecured. 

6. Funding time 

Short-term loans are typically paid out within 24 hours, or in the case of a cash advance instantly. Funding for mortgages and car loans, on the other hand, may take longer since the amount paid out is higher and there is more paperwork to process.

7. Becoming debt-free 

Another big advantage of a short-term loan is that you can be free of financial obligations within a year, unlike long term loans which can take decades to repay.

8. No flexibility

Since short-term loans come with a shorter repayment timeline, there are fewer chances of refinancing or extending the term when you can’t make monthly repayments. 


Types of Short-Term Loans

Here is a quick look at the most common short-term loans taken out in Canada.

Installment loans

As the name implies, these loans are paid off in regular monthly, weekly or biweekly installments. They are very easy to apply and qualify for—the entire process is carried out online, while funds can be transferred within minutes. Bad credit borrowers are accepted although they might get a higher interest rate than those with a solid credit rating

Another plus: the average APR ranges between 5% and 45%, so these loans offer more affordable repayments compared to payday loans. 

Note: This only refers to products offered by online lenders. Personal loans, which are also known as installment loans, are very different from the financing discussed above.


Payday loans

Unlike installment, payday loans have a much higher interest rate (the FCAC says the cost of a payday loan could be equivalent to an interest rate of 500-600%) and shorter repayment terms (about 14 days or on your next payday). Payday lenders also offer smaller amounts, up to $1,500. 

These loans are paid out fast and there is typically no credit check involved. That said, these are quite expensive and should only be considered as a last resort. 

Do you have a poor credit score? Here is a list of other loans in Canada that do not involve a credit check

Credit card cash advance

A credit cash advance is another short term loan that pays out instantly. As such it is best suited to borrowers who need quick cash or don’t have the time or credit score to apply for a traditional loan. 

On the downside, cash advances on your credit card incur higher interest (usually 22% rather than the 19% you pay on regular purchases), while the rate is applied from the day of the transaction, regardless of whether or not you pay your balance in full. 

Types of Long Term Loans

The type of long-term loan you get mainly depends on what you need the money for. Here are your options.

Personal loans

Personal loans work similarly to installment loans, meaning lenders provide you with a lump sum (from $3,000 to $50,000) which you repay in monthly or weekly installments. The difference is that personal loans are used for specific purposes, such as large-scale home renovations, furniture purchases, debt consolidation or as a down payment for a car. 

The best personal loan providers in Canada typically offer terms between 12 and 60 months, while interest rates move between 8.99% and 59.99%, depending on your credit rating.  

Home loans

Typically, home loans in Canada come with a 5-year term. If you have not paid off your loan in that term, you will need to renew your mortgage, so it might take you several terms to repay the home loan in full. Mortgages can be extended up to a maximum of 25 years (provided your down payment for the property is under 20%). 

There are pros and cons to repaying your mortgage faster—for instance, short-term mortgages come with fixed and variable interest rates, while longer-term loans might require you to pay a fixed rate throughout the life of the loan, thereby preventing you from taking advantage of lower interest. 

Car loans

Since car purchases often extend beyond the average Canadian’s budget, auto loans are one of the most prevalent on the market today. Borrowers can apply for a car loan at any financial institution like banks or credit unions, as well as car dealerships and online lenders. The average term of a car loan is 6 years, however, you can easily find financing that extends to 96 months. 

Normally, car loans, like mortgages, have a lower interest rate (around 5% to 6%) since you are using your vehicle as collateral. 

Bottom Line: Which Is the Right Option for Me?

While a short-term loan is paid off faster and costs less overall, not all borrowers can afford to make higher monthly repayments. What’s more, if you are looking to take out a larger sum of money, a short-term loan will not be able to meet your requirements. 

You need to carefully calculate how much of your monthly or weekly budget you can spend on loan repayments. Then use that amount as a reference point when comparing lenders—this way you can choose a loan term and interest rate that you will be able to afford.


Why is a shorter loan term better?

Short term loans pay out faster, are easier to qualify for and can cost almost 5 times less in interest than a long term loan. That said, due to the short repayment period, your lender might offer a higher interest rate on the loan, making your monthly payments almost $1,000 higher than you’d get with a longer loan. If you can’t afford to make higher payments on your monthly or weekly budget, a short term loan might not be the best idea. 

What is considered a short-term loan?

A short term loan is one that needs to be paid off within 6 months to a year. At most, you’ll have 18 months to make the repayment. Anything longer than 18 months is considered a medium or long-term loan. 

Is it easier to get a long term or short term loan?

One of the biggest short term vs long term loan differences is the ease of approval. Namely, lenders of long-term loans, which usually involve larger sums, have stricter eligibility criteria. Providers of shorter-term loans, such as payday and bad credit installment loans, have more lenient screening procedures. What’s more, they usually accept borrowers with a poor credit score or lower income, making them much easier to apply and qualify for.


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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