Short term vs long term loans: what's the difference?
Written by
Joe Towner
Reviewed by
Amy LancashireThe simple difference between a short term and a long term loan is how long you take to pay it back, however, changing the repayment period also affects other aspects of the loan.
A short term loan is repaid over a shorter period, usually up to a year or two. You'll have higher monthly payments, but you'll pay less interest overall because you're borrowing for less time. A long term loan is spread over several years. Your monthly payments are lower and you can usually borrow more, but you'll pay more interest in total. Neither type is better on its own. The right choice depends on how much you need, what you're borrowing for, and what you can comfortably afford each month. Here's how they compare.
What is a short term loan?
A short term loan is a personal loan you repay over a shorter period, typically up to around one to two years. You borrow a set amount, then repay it in fixed monthly instalments until it's cleared. Because the term is short, each monthly payment is larger. The upside is that you're paying interest for less time, so the total cost of borrowing is usually lower than the same amount over a longer term. Short term personal loans tend to suit smaller amounts and one-off costs you know you can clear fairly quickly. This is different from a payday loan, which is a much shorter and more expensive form of borrowing. Those are covered separately below.
What is a long term loan?
A long term loan is a personal loan repaid over several years. For an unsecured personal loan (one that isn't tied to an asset), terms typically run up to around seven years, though some lenders go longer, depending on the lender and the amount. Spreading repayment over a longer period lowers your monthly payment, which can make a larger amount more manageable month to month. The trade-off is that you're paying interest for longer, so the loan costs more overall. Longer terms are common for bigger purchases, home improvements, or using a loan for debt consolidation. Very large or very long term borrowing is often secured against your home instead. It's worth understanding the difference between what an unsecured loan is and what a secured loan is before you borrow, because a secured loan puts your property at risk if you can't keep up repayments.
Short term vs long term loans: the key differences
| Short term loan | Long term loan |
|---|---|---|
Repayment period | Up to around 1–2 years | Around 3 years or more |
Loan amount | Smaller | Larger |
Monthly payment | Higher | Lower |
Total interest paid | Lower overall | Higher overall |
Secured or unsecured | Usually unsecured | Unsecured, or secured for larger sums |
How much short-term vs long-term loans cost
The clearest way to see the difference is to look at the same loan over two different terms. Say you borrow £5,000 at a fixed 21.7% APR:
Over 2 years: £253.99 a month, and £6,095.76 in total, including interest and fees.
Over 5 years: £131.91 a month, and £7,914.60 in total, including interest and fees.
The longer term is just over half the monthly payment of the shorter one, but adds significantly to the total cost. This is a simplified illustration that keeps the interest rate the same for both terms to show the effect of the term length on its own. In practice, the rate you're offered can vary by lender, loan amount and your credit history, and it's worth understanding the difference between APR and interest rate when you compare offers. For context, the average rate on new personal loans in the UK was 9.09% in March 2026, according to the Bank of England, though individual rates depend on your circumstances.
What about payday loans and other very short-term loans?
Payday loans are a separate category of very short-term, high-cost borrowing. They're usually small amounts (often between £50 and £1,000) repaid within weeks, typically by your next payday. They're much more expensive than a standard personal loan, which is why they're capped by the regulator. Under the Financial Conduct Authority's price cap on high-cost short-term credit, interest and fees can't add up to more than 0.8% a day, default fees are capped at £15, and you can never be charged more in interest and fees than the amount you originally borrowed. If you're weighing this up, read our full guide on what a payday loan is before deciding.
Which type of loan is right for me?
A useful rule of thumb is to match the length of the loan to what you're borrowing for. Borrowing over a much longer period than you need to means paying interest for longer than you have to.
A shorter term makes sense if you're borrowing a smaller amount, you can afford the higher monthly payment, and you want to keep the total cost down.
A longer term makes sense if you need a larger amount, a lower monthly payment matters more to your budget, and you accept you'll pay more interest overall.
Whichever you choose, check whether you can overpay or clear the balance ahead of schedule. Being able to repay a loan early can save you interest if your circumstances change. If you want a broader grounding first, our guide on how loans work walks through the basics.
FAQs
There are a range of financial products available that may suit your needs. We encourage you to research your options carefully and consider seeking independent financial advice before making any decisions. This blog is for informational purposes only and does not constitute financial advice.
