Advanced Placement (AP) High School


b. What are the advantages and disadvantages of a shorter-term versus a
term loan? (5 points)

Answers

Answer 1

Advantages of a shorter-term loan:

Lower overall interest payments: With a shorter-term loan, the total amount of interest paid over the life of the loan is typically lower compared to a longer-term loan. This means you may save money in interest payments.

What are Loans?

Others are:

Faster debt repayment: Shorter-term loans allow you to pay off the debt faster, which can help you become debt-free sooner. This can free up cash flow for other purposes and provide a sense of financial freedom.

Lower risk of default: Since shorter-term loans have a shorter repayment period, there is a lower risk of defaulting on the loan. This is because the loan is paid off relatively quickly, reducing the chances of unforeseen events affecting your ability to repay the loan.

Disadvantages of a shorter-term loan:

Higher monthly payments: Due to the shorter repayment period, monthly payments for shorter-term loans are typically higher compared to longer-term loans. This can put a strain on your monthly budget, as you'll need to allocate more funds towards loan payments.

Reduced borrowing capacity: Shorter-term loans may result in a lower borrowing capacity compared to longer-term loans. This is because the higher monthly payments may affect your debt-to-income ratio, which lenders use to assess your creditworthiness. This may limit your ability to borrow for other purposes, such as buying a larger asset like a home.

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