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Differences between short-term financing and long-term financing
Posted By Bandenia Challenger Bank
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Short -term financing and long-term financing fulfill the same function: to provide you with capital that you do not have under normal conditions so that you can make different types of acquisitions.
However, the conditions and characteristics vary between these two types of financing, as you will see now.
Funding Objectives/Goals
As its name suggests, short-term and long-term financing grant your capital in periods of time that vary from each other. This time difference will significantly affect what things you can pay or finance with each type of financing.
Short-term financing corresponds more to the resolution of immediate or upcoming needs, such as paying payroll, filling inventories, personal or family purchases, starting a project, among other possible acquisitions. What these purchases have in common is that they are of small magnitudes, medium at most;
On the other hand, long-term financing is dedicated to more important purchases or that mean a greater increase in your assets, such as vehicles or real estate. In this sense, it can be said that the types of long-term financing such as the mortgage are directed to more ambitious goals and that suppose a greater economic effort.
return terms
The magnitude of purchases for long-term financing requires a longer period of time for you to repay them since they are usually executed for larger amounts. The debts generated by long-term financing are paid periodically by means of installments that the debtor and the creditor establish before the start of the operation.
While long-term financing is paid in terms of years, short-term financing is based on the debtor, you, paying the debt in the shortest period of time possible. This directly affects your personal and family financial planning because you will have less time to pay off debts and not fall into a delinquent situation.
Regarding other repayment terms, long-term financing is associated with greater risks for the debtor, at least in terms of mortgage, because the lender or lenders involved can seize the property if you do not pay the installments on time. Short-term financing repayment terms are less strict and harsher in terms of consequences.
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