Short-term and long-term loans may refer to the time period in which a loan is paid back. Short term loans are generally to be repaid within a few months or a year or so.Long-term loans are generally required for larger amounts or for dealing with bigger transactions such as a home purchase loan. Typically, long-term loans are considered more desirable than short-term loans: You'll get a larger loan amount, a lower interest rate, and more time to pay off your loan than its short-term counterpart. Short-term financing is usually aligned with a company's operational needs. It provides shorter maturities (3-5 years) than long-term financing, which makes it better-suited for fluctuations in working capital and other ongoing operational expenses.
With all else equal, most types of long-term loans are riskier than short-term loans for lenders. This is because even established businesses could fall on hard times during their repayment period. For instance, many successful businesses have faced financial difficulties due to the COVID-19 pandemic. One of the main differences between short term and long term loans is the amount issued. A general rule of thumb is that the higher the loan amount, the longer it will take to repay it (though there may be some exceptions).
Another difference is that it may be easier to obtain loan approval for short-term loans. Short-term lenders might not require as stringent background credit checks as long term lenders. For instance, a mortgage loan might be associated with a very thorough and sometimes demanding risk analysis process before the loan gets approved. In comparison, some short-term loans can almost be obtained on-the-spot. Lastly, short-term loans tend to have higher, less flexible interest rate options. This is to compensate for the fact that the repayment period will be shorter, and also to help prevent borrower default (many short term borrowers are have bad credit ratings).