Difference between short-term and long-term financing

Knowing about long term and short term sources of finance helps you choose the right personal loan based on your needs—whether it’s for urgent expenses with a short-term loan or larger investments requiring long-term finance.
APPLY ONLINE
Personal loan
APPLY ONLINE
5 min read
18 September 2025

Understanding the difference between long term and short term finance is crucial for effective financial planning. While short term sources of finance address immediate cash flow needs, long term finance supports investments and growth over an extended period. Choosing the right option ensures financial stability and success.

What is short-term financing?

Short-term financing, applicable within a year, acts as a quick solution for pressing personal requirements. It helps address sudden expenses, manage monthly bills, or tackle unexpected financial challenges. Sources for personal short-term financing include credit cards, payday loans, or personal lines of credit. The advantages lie in quick accessibility, flexibility, and a lower overall cost due to the shorter repayment period.

What is long-term financing?

Long-term financing goes beyond a one-year timeframe and is suitable for substantial personal investments. This could involve financing education, purchasing a home, or starting a business. Sources for personal long-term financing may include traditional bank loans, mortgages, or personal loan with extended repayment plans. While offering stability and strategic planning, long-term financing involves a more extended repayment period and potentially higher overall costs.

What are short term and long term goals?

  • Short-term goals: These are objectives you aim to achieve within a few weeks to a year. They usually cover urgent needs like managing cash flow, paying bills, or handling emergencies.

  • Long-term goals: These focus on larger financial aspirations spread across years, such as buying a home, expanding a business, or planning trips through personal loans for travel.

Here are the key differences between short-term and long-term financing

1. Duration

  • Short-term loans: Typically, last up to 1 year and can sometimes be as short as a few weeks or months. They are ideal for quick repayment needs.

  • Long-term loans: Come with a repayment period stretching over several years. They are often chosen for larger investments such as real estate, business expansions, or even personal loans for travel.

2. Interest rates

  • Short-term loans: Generally, have higher interest rates since lenders consider them riskier due to the short repayment cycle.

  • Long-term loans: Usually come with lower and more competitive personal loan interest rates. The extended tenure reduces risk for lenders, making it more affordable for borrowers.

3. Purpose

  • Short-term loans: Best suited for immediate needs like managing cash flow, covering seasonal expenses, or handling emergencies.

  • Long-term loans: Secured for strategic goals such as equipment purchase, facility expansion, or product launches.

4.Repayment structure

  • Short-term loans: Repayments are frequent and smaller in value, aligned with the shorter tenure.

  • Long-term loans: Offer structured repayment with lower monthly instalments spread over several years, making it easier to manage larger amounts.

Long term and short term sources of finance

  • Short term and long-term finance serve different financial needs based on duration and purpose.

  • Short term sources of finance include working capital loans, trade credit, and overdrafts, ideal for immediate expenses.

  • Long term and short-term sources of finance differ as long-term finance covers investments like machinery, property, and expansion.

  • Choosing the right source ensures effective cash flow management and business growth.

Pros and cons of short-term and long-term personal loans

Loan type

Pros

Cons

Short-term personal loan

1. Quick approval and disbursal.
2. Debt cleared faster due to short tenure.
3. Useful for emergencies or urgent needs.

1. Higher interest rates.
2. Frequent repayments may stress finances.
3. Smaller loan amounts, may not cover big expenses.

Long-term personal loan

1. Lower and affordable personal loan interest rates.
2. Longer tenure reduces EMI burden.
3. Higher loan amounts for major goals like personal loans for travel, home renovation, or business growth.

1. Interest paid over many years.
2. Prepayment/foreclosure may involve charges.
3. Longer debt cycle impacts future borrowing capacity.

 


Finally, the choice between short-term and long-term loans is determined by the borrower's individual financial circumstances. Understanding the differences between these two types of loans is critical for making sound financial decisions and ensuring that the financing selected is consistent with the borrower's overall financial strategy.

Bajaj Finance Limited provides personal loans with substantial loan amounts that can be repaid over longer periods ranging from 12 months to 96 months. These funds can be used for a variety of purposes, including loan for health care, personal loan for wedding, personal loan for higher education, and home modifications.

Apply to get the best personal loan deal.

Disclaimer

1. Bajaj Finance Limited (“BFL”) is a Non-Banking Finance Company (NBFC) and Prepaid Payment Instrument Issuer offering financial services viz., loans, deposits, Bajaj Pay Wallet, Bajaj Pay UPI, bill payments and third-party wealth management products. The details mentioned in the respective product/ service document shall prevail in case of any inconsistency with respect to the information referring to BFL products and services on this page.

2. All other information, such as, the images, facts, statistics etc. (“information”) that are in addition to the details mentioned in the BFL’s product/ service document and which are being displayed on this page only depicts the summary of the information sourced from the public domain. The said information is neither owned by BFL nor it is to the exclusive knowledge of BFL. There may be inadvertent inaccuracies or typographical errors or delays in updating the said information. Hence, users are advised to independently exercise diligence by verifying complete information, including by consulting experts, if any. Users shall be the sole owner of the decision taken, if any, about suitability of the same.

Related Videos

FAQ

Which is cheaper, short-term or long-term?

Generally, short term sources of funds involve higher interest rates but lower total interest compared to long-term finance, which usually has lower rates but longer repayment.

Is it better to finance long term or short-term?

Understanding the difference between short term and long term finance helps decide the best option based on your cash flow and investment goals.

Which is the most common source of short-term finance?

The most common short term sources of finance are trade credit, bank overdrafts, and working capital loans to manage daily operational expenses.

What are the different sources of long-term finance?

Common sources of long term finance include term loans, debentures, equity shares, and retained earnings, used for business expansion and asset purchases.

What is the main difference between short-term and long-term financing?

The key difference is duration—short-term financing lasts up to a year, while long-term financing extends over several years to cover bigger financial goals.

Can short-term loans be pre-approved?

Yes, some lenders offer pre-approved short-term loans based on eligibility and credit history, providing quick access to funds for urgent or immediate financial needs.

Show More Read Less