Short Term vs Long Term Personal Loans | Personal Loan Terms

Personal Loan Terms: Should you Choose a Short Term or
Long Term Loan?

Most personal loan terms vary from 1 year to 7 years. Typically, larger amounts being borrowed accompany longer repayment terms and therefore qualify as ‘long term personal loans’. While shorter term loans typically require larger instalment payments, they can usually save you money in the long term.

What is a short term personal loan?

Short term personal loans are great for fast access to money. It is for this reason that they don’t take long to process, as they do not require you to offer collateral. However, due to the nature of the loan being unsecured, you will likely be required to pay higher interest. Despite this, you may still end up paying less in interest due to the short commitment and short-term repayment period.

What is a long term personal loan?

Long term loans are typically for 5 to 7 years, which allows you to finance more expensive purchases. As the loan is spread out over a longer period of time than a short term loan, you end up paying less in instalments. However, in turn, you will end up accruing more interest; this means you will likely end up paying more interest than on a short term loan. Additionally, some lenders will require you to pay an early settlement fee if you wish to repay your loan early; this fee can range from anywhere up to $800. Nifty Loans does not charge early exit fees, so you can repay your loan at your own pace.

Which option is better: Short term loans or long term loans?

Depending on what you wish to use your loan for, and therefore how much you need to borrow, will influence which loan option is most suitable for you. However, objectively, a short term loan is ‘better’ because you end up paying less in interest and are out of debt faster. 

To illustrate this, let’s use an example. If you borrow $5,000 at an interest rate of 8.75% over three years, your repayments will be $317 per month. You will end up paying $1,406 over the life of the loan in interest. If you were to add two more years to repay the loan, your monthly costs would drop to $206.50 but the interest paid will be $2,382.50. So, by adding two years to the loan, you end up paying an extra $976.50. While the difference would not be as astronomical if you had a higher interest rate on a short term loan, it is clear that accumulating interest costs more in the long run.

Pros and cons: Short term vs long term personal loans

To clearly illustrate the benefits and shortfalls of both loan options, the pros and cons of each will be listed in the tables below.

Pros and cons of short term loans

Pros of short term loans Cons of short term loans
They’re fast
You have a lot of options
You’re not tied-down for a long time
Higher interest
Additional fees and charges
There is a limit on how much you can borrow
Additional fees or even defaults if you miss repayments

Pros and cons of long term loans

Pros of long term loans Cons of long term loans
You can borrow more
Interest rates are usually lower
You have a lot of options
Available for most credit profiles (e.g. if you have bad credit)
Tied into debt for a longer time period
Extending debt terms will increase how much you pay overall
Additional fees and charges

So, which is the right option for me?

There are an array of factors that will influence which is the right option for you. While short term loans are more advantageous in terms of interest and repayment times, it may not be realistic if the high repayments are unaffordable to you. If you have a high debt-to-income ratio, it may not be a manageable credit solution. Typically, if your monthly expenses are more than 20% of your income, you may only qualify for long term personal loans.

Tips for managing a personal loan

If you are considering taking out personal finance, there are some ways to make it easier to manage.

Create a budget

To avoid overborrowing, create a budget for yourself with your income and expenses clearly outlined. In this way, you have a very clear understanding of how much you can afford to spend on loan repayments. This will also outline to you whether a short term loan or a long term loan is best suited.

Make your repayments on time

Always prioritise making your repayments on time. It is likely that your loan will accompany late fees if your repayments are late; late repayments can also damage your credit rating. Most lenders will allow you to set up a direct debit from your bank account to simplify this for you.

Make additional repayments when you can

To pay off your loan as fast as possible, and subsequently save on interest and monthly fees, make additional repayments when it is feasible for you to do so. Check with your provider whether they will charge you for doing so; Nifty Loans does not charge for extra payments or early settlement fees. You can pay off your loan at a rate that suits you.

Only take on debt you can afford

Avoid incurring unnecessary debts if you can. If you have taken out a personal loan, try not to also take out a credit card or car loan at the same time. This is to ensure that you are staying on top of your current repayment schedule and not overborrowing. 

Personal loans with Nifty Loans

Nifty Loans offers both short term personal loans and long term personal loans. We offer affordable loans from $500 to $10,000, 100% online. Our quick loans have repayment terms that vary from 9 months to 24 months; we don’t charge early exit fees, so you can repay your loan early without additional fees. 

We are one of Australia’s fastest lenders, and we operate completely online. This means that we can deliver our outcomes fast and hassle-free. It also allows us to be more flexible with our credit requirements, and can therefore also offer bad credit loans to eligible borrowers.

Want to build your credit score? You may be able to build your credit score using a personal loan. If you are a student searching for a personal loan, we have a guide to personal loans for students for everything you should know.

Rachel Horan
Rachel Horan