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Loans: quick guide

Short-term loans vs long-term loans 

Should you get a short-term loan? Or a long-term loan? Our quick guide could help you decide.

Snow globe with money inside representing a short-term loan

What are short-term loans?

With a short-term loan, you could often borrow something like £3,000. Or, potentially, up to £50,000. 

You'd then pay back what you owe, plus interest, usually within 18 months or two years.

(To apply for a loan you must be 18+. Other criteria may apply depending on the lender.)

 

Types of short-term loans

Short-term loans include:

  • Payday loans: you could often borrow from around £50 to £1,000. This is usually to tide you over until you're next paid. You'd then pay the money back.
  • Personal loans: you could potentially borrow more than with a payday loan. You'll usually pay the same amount back each month until you've paid back your loan. 
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What are the pros of a short-term loan?

  • Quick: you could get your money within hours. You could also pay your loan off sooner, as you're not borrowing for long. 
  • May cost less overall: as you pay the loan off faster, you might pay less overall. (Take care, though, this depends on the interest rate.)
  • Usually unsecured: so you don't need an asset, like a home, to borrow.
 

What are the cons of a short-term loan?

  • Higher interest rates: short-term loans usually have higher interest rates than long-term loans. This could make them more expensive.
  • Monthly payments could be higher: as you're paying the loan back over a shorter amount of time, it could cost you more each month. (It all depends on how much you borrow and what the interest rate is.)
  • Fees and penalties: you may have to pay a fee upfront to get some short-term loans, like payday loans (do take care it's not a scam). You might also have to pay late payment fees if you miss a payment. 
  • Risk of a debt cycle: if you rely on short-term loans to meet your financial needs, you could become trapped in a debt spiral.
  • Pressure to pay back fast: you don't have long to pay back, so you need to be disciplined.
Read more about interest rates and APR Open in new window
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What are long-term loans?

Want longer to pay back your loan? With a long-term loan, you could take longer to pay back your loan. So, you can normally borrow more than with a short-term loan.



Types of long-term loans

  • Mortgage loans – you could borrow to buy a home. Mortgages are usually for 25 years, but 30+ year mortgages are becoming more common.  
  • Student loans – you could borrow money to help pay for university, or college, including living costs. You only start paying back after you earn over a certain amount. 
  • Personal loans – you could borrow for a big purchase, to improve your home, or to consolidate debt (roll your debt into one place). Usually, you'd pay your loan back over 3 to 10 years. 
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Pros of long-term loans

  • Cheaper monthly payments: as you're spreading payments over a longer time, you often pay less each month.
  • You could borrow more: you could spread the cost over years. This could help you afford big purchases.
  • Fixed cost each month: the interest is usually fixed. This means you'd pay the same amount back each month.
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Cons of long-term loans

  • More expensive overall: the interest rates may be lower. But as you take longer to pay the loan back, it could cost more overall as you'll pay more interest.
  • It's a long-term commitment: this could be a challenge if your circumstances change. 
  • You could lose your home if you don't repay your mortgage: that's because a mortgage is secured against your home. 

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