If you’re considering taking out a loan, you may have noticed lenders offer loans with different borrowing periods.
Some will let you borrow and repay a loan over shorter periods, or “terms,” while others will allow you to spread the borrowing out over several years.
So, for example, a loan of Ksh500,000 could have a term of 12 months, three years, or even ten years. The loan terms offered by the lender can vary based on factors like your credit rating, the type of loan, and your preference.
Your loan term will affect how much you can borrow, how much you will repay per month, and how much interest you will pay over the life of the loan. Before applying for a loan, it is vital to understand the difference between short- and long-term loans.
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A loan term is the period over which borrowed money will be repaid. They can vary in length, impacting how much you repay each month and the total amount you will repay, including interest.
Typically, the loan terms constitute a legally binding component of the credit agreement. In other words, once you enter the loan contract and receive the funds, you must make repayments according to the agreed schedule and loan term.
Lowering or extending a loan term by making fewer or more repayments may result in fines.
There are two main types of loans you can apply for short-term and long-term loans.
These are loans with a shorter repayment period, ranging from a handful of days or weeks to one year.
Short-term financing can be used for personal or business purposes, including covering unexpected immediate expenses or managing cash flow. Common types of short-term loans include digital loans, advance salary or payday loans, and emergency sacco loans.
Short-term loans typically don't require a collateral or a guarantor. However, some lenders, such as microfinance institutes, will let you use your car logbook to secure short-term logbook loans. Other credit institutions, including commercial banks, offer secured and unsecured short-term loans.
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Long-term loans are financial instruments with a repayment period extending beyond one year. This loan tenure can be somewhere between one and 30 years. These loans are often used for significant investments, such as purchasing a home, starting a business, buying a car, paying for higher education, or funding a large project.
You can borrow more money when you opt for long-term loans. However, lenders may ask for collateral, use what you are financing as collateral, or ask for a co-signer.
Long-term loans typically have lower monthly repayments, which might make them look affordable. But they can be more expensive. This is because interest rates are presented annually, which means the longer you carry the loan, the more interest you’ll pay in the long run.
For example, let's look at a Ksh300,000 personal loan with a 17% APR interest:
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Purpose of The Loan:
Debt Tolerance:
Speed of Accessing Funds:
Loan Amount Needed:
Collateral Requirements:
Market Conditions:
Credit Rating:
Income Stability:
Future Financial Plans:
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The decision between a long-term and a short-term loan depends on your financial needs, goals, and the specific circumstances of your situation.
If you can quickly repay the loan or have urgent financial needs, a short-term option might be more appropriate. Short-term loans can be useful for financing specific projects with a quick turnaround, such as inventory restocking, seasonal business fluctuations, or capitalizing on a short-term business opportunity. Short-term loans may have higher interest rates, but if you can repay the loan quickly, the overall interest paid may be lower than a long-term loan.
Long-term loans may be suitable for larger capital investments, such as buying real estate, equipment, or business expansion. Additionally, a long-term loan with a fixed interest rate may be a better option if you prefer stable and predictable monthly payments.
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