Financial advisors recommend that borrowers go for short term loans. Short term loans cost less than long term loans. The term of a loan refers to the how long the money is borrowed by a person. Loans that are borrowed for about one week to several months are usually described as short-term loans and, loans that are borrowed for several years, even up to 25 years are definitely described as long-term loans. But the description of whether a loan is short-term or long-term does not matter. What matters is the exact duration of the loan. Based on this duration, the total loan cost can be determined. Determining the total cost of the loan To have a pretty good idea of the total loan cost, one must simply recall a little multiplication. That is, the given annual interest rate must be multiplied with the given loan term. For example, the interest rate can be 5% for a loan which is worth 4,000. If the loan term is for two years, one will need to multiply the interest rate (5%) with the number of years (2). The product is 10%. The next thing to do is to multiply the resulting percent (10%) with the worth of the loan (4,000). The result is 400, which is the total interest for the loan. If the loan term is made shorter to 18 months, this is equivalent to 1 years (1.5 years). Utilizing the same process described above, the total interest for the loan in this shorter loan term is 300. Clearly, the shorter loan term meant lower total interest. However, some people who wanted a long-term loan argue that such long-term loans have lower interest rates. But if a person does the same computation, the long-term loan will be more costly. Long Term Loans are Costly One may find that long-term loans can offer as low as 1.5% on the worth of the loan. But if the loan is for as long as ten years, this low interest rate does not mean low loan cost. To illustrate, one must again multiply the interest rate (1.5%) with the number of years (10) and then with the cost of the loan. If the cost of the loan is 4,000, then the total interest is 600. This is definitely higher than the first computation of total interest. Deciding on the Best Loan Term The main advantage of long-term loans is the affordable interest rates. But they, in fact, result to higher loan costs. Therefore, the borrower must keep a balance between interest rates and loan terms, so that he can get the most suitable loan. That is, the borrower must select the loan that offers affordable interest rates for the shortest possible loan term. You may freely reprint this article provided the following author's biography (including the live URL link) remains intact: About The Author |
