Nowadays financial market is repleted with a lot of different financial products. The main players of financial market are still banks whose capitalization reaches several billions. However, in this market for several years competitive positions are taken by non-bank credit providers or, in other words, non-bank creditors. Their activity, competitive advantages and effective marketing campaigns have been able to attract a large amount of clients and are still attracting.
Long term loans are loans which are lend for term which is not longer than one year, but short term loans are loans which are lend for term which is shorter than one year. Often these concepts are referred to bank loans and non-bank loans, namely, long term loans are considered to be bank loans, but short term loans are considered to be non-bank loans. It is wrong, because long term loans and short term loans are offered by both sectors – banks offer not only long term loans, but also short term loans, and non-bank lenders offer not only short term loans, but also long term loans. Of course, there are only few non-bank lenders which offer long-term loans, but they are. In order to see a difference between long term loans and short term loans, let’s look at their characteristics.
Long term loans:
- Long term loans are loans like mortgage loan, student loan, car loan, consumer loan and investment loan;
- Long term loans are lend for term which may be from couple of years to several tens of years;
- The amount of long term loan can be from couple hundreds to several thousands;
- Today the majority of long term loans are issued by creditors of banking sector;
- Long term loans, if they are issued by banks, have relatively low annual percentage rates or, in other words, APR which depend on a lot of various factors;
- Borrowing long term loans, in the majority of cases a pledge or a guarantee are required;
- Before issuing of long term loans lenders pay attention to such criteria as potential client’s credit history and creditworthiness, because, if some of these criteria are negative, issuance of credit may be refused.
Conditions of short term loans and conditions of worldwide economics have encouraged formation and development of non-bank lending field which in majority of cases offer short term loans. If we have to compare long term loans and short term loans by their availability, short term loans are more democratic, because they are available even for those who have negative credit history and weak creditworthiness. Thanks to this advantage non-bank creditors have become competitive players in lending market. This fact bothers banks and forces them to act. Banking field is not the only one which worries about development of non-bank lending – also government does everything to restrict non-bank lending.
Short term loans:
- Short term loans are loans like credit line, fast loan, credit for financing current assets and factoring;
- The amount of short term loans is usually from couple of tens to several hundreds;
- Short term loans are usually lend for time which in majority of cases is not longer than 30 days or one month; it can be longer, but it cannot be longer than one year as all short term loans;
- Nowadays the majority of short term loans are issued by non-bank lenders;
- The main and, it can be said, the only drawback of short term loans is their annual percentage rates which are extremely high, if we compare them with APRs of long term loans;
- Also penalty fees of short term loans are high; actually in this field penalty fees are the main source of profit. Most of the profit comes from less wealthy people, because non-bank lenders offer them loans whom banks fundamentally do not offer. For this reason potential client’s credit history and creditworthiness are of secondary importance.
Both long term loans and short term loans are not good or bad – everything depends on borrower’s attitude, because, as we all know, every loan commitments require serious and responsible attitude, otherwise credit history may become negative and chances of getting the loan in the future may reduce.