Short Term Loans vs Long Term Loans

Sponsored Content – Real estate investment loans can be tricky and sometimes it can be difficult to know which ones are the best, says Michael MikhailCEO, Stratton Equities.

Although there are many versions of loans, let’s get down to business. There is a time frame that you must pay for your loan. It can be shorter, ranging from a few months to a few years, and long-term loans can take more than a decade to pay off. Now, there are pros and cons to each of them and one of them may be best suited depending on your loan scenario.

Types of short-term real estate investment loans:

  • Bridging loans
  • hard money loans
  • Fix-and-Flip Loans
  • Foreclosure-bailout loans

Types of long-term real estate investment loans:

  • Loans on favorable terms
  • Rental loans
  • NO-DOC Loans
  • Stated income loans
  • Loans without income verification

The differences between short-term loans and long-term loans

The approval process
Generally, short-term loans have a faster application and approval process. Since it’s a shorter commitment, lenders may be more willing to approve a short-term loan than one they’d be stuck in for nearly a decade. For both types of loans, the lender wants to be sure that the borrower will be able to repay them, but it is less risky when the loan is only for several months. Due to the quick approval process, short-term loans tend to be better if you need money sooner rather than later. Also, thanks to the short-term commitment, short-term loans tend to require less documentation to prove that you will repay the loan.

While long term loans require more documentation to prove to the lender that they want to enter into a long term agreement with you. Having to sift through more documentation and do more research to find out if you are a responsible borrower will make the approval process much longer.

Finally, short-term real estate investment loans tend to have much higher approval ratings. Since it is a shorter commitment, people are much more likely to approve a borrower who has a bad credit history or not too much. They can instead ask for collateral, but whatever the approval process is easier. Conversely, a long-term loan is a longer and more difficult approval process. The lender tends to really look at all the details and therefore has a much lower approval rate.

Interest rate
For a short term loan, borrowers are more likely to be offered high interest rate loans. Due to the short application process and the fact that it tends to be more lenient and flexible, private lenders tend to offer short-term loans with significantly higher interest rates. This is why, for short-term loans, you want to shorten the repayment period as much as possible. You don’t want to spend two years paying off a loan with high interest rates. Instead, consider paying it back in months rather than years.

With longer term loans, you are more likely to receive a lower interest rate. The lender has done a lot more research on you, they think they know you will pay off the debt, so they are more likely to offer you a lower interest rate. However, be sure to do the math, you could end up spending a lot more money over many years with a small interest rate than with a much higher interest rate over a few months. For long-term loans, the lower interest rate with a much longer repayment term can cost you as much in interest rate as your original loan. So with interest rates you have to be careful and do the math.

Loan repayment schedule
Due to the nature of short-term loans, which are for a much shorter period, payments may be required much more frequently. If the loan is only for a few months, the repayment can be every two weeks or more frequently. On the other hand, if it is a long-term loan, you may not be paying monthly, but every few months or quarterly. So, if you don’t have a steady income in your business, it might not be a good idea to take out a short-term loan because you can’t make all the frequent payments.

Amount of money
With a short-term loan, you are more likely to only be able to borrow a small amount of money for your loan scenario. Since the real estate investor has to repay the sum of money in a short period of time, a lender is unlikely to be willing to lend a large sum of money. Since a larger sum of money carries a greater risk, a private mortgage lender will be reluctant to offer you more than a small sum. Whereas with long term loans lenders know more information about you and therefore would be more likely to increase the risk and lend you more money.

What could be better for your investment property? Long-term loans or short-term loans?

There’s so much to know about loans that it’s important to read up on all the pros and cons before making a decision. Make sure to be careful before agreeing to anything.

Each loan scenario is different depending on the borrower’s credit rating, investment experience, liquidity and reserves. The loan will still be structured or calculated based on these results.

The best way to find out what is best for your investment property is to contact a direct private lender to help you purchase your investment property.

If you have an investment property and would like to speak with one of our loan officers, call Stratton Equities at 800-962-6613, email us or apply for loan pre-qualification today!

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