Effects of credit repayment period on credit demand
Name
DDBA 8110 - Business Operations
Walden
2022
Effects of credit repayment period on credit demand
According to Doward, (2006) while the long-term plan looks attractive, there are some benefits
to the short-term loan. One is that you will likely benefit from being covered by the warranty
during the length of the term. Many times, long-term repayment plans outlive the warranty,
which means not only do you pay a monthly car note; you also have to start paying for repairs
out of pocket. Some people with long-term loans purchase extended warranties to combat this
potential problem; however, doing so increases the monthly payment, which just might defeat
the purpose. Trip, (1998) asserts that consolidate your debts, you`ll need to take out a loan big
enough to cover multiple debts (plus any associated charges). By using this loan to pay those
debts off, you will in effect be consolidating those debts into one.
According to Rosenzweig, (2001) this new, single debt can be much easier to handle than several
different debts - just one monthly payment and one interest rate should make keeping track of
your finances a simpler task.
If you wish, you may be able to repay your debt consolidation loan over a longer period of time
than your original debts in order to reduce your monthly outgoings. The benefits of this are
obvious, but your debt will be a burden for longer and you`ll pay more interest than if you had
repaid that debt consolidation loan over a shorter time period. Having said that, you may still
save interest in the long run if the debts you are consolidating have a higher interest rate than
your new loan. With most loans, there is a set amount of time within which the loan must be
repaid. These are referred to as short-term loans and are usually between 1 to 3 years. However,
if your business receives a long-term loan, the time frame is much broader. The typical time
frame for a long-term loan is between 3 to 10 years. There are some instances, though, in which
a long-term loan can last as long as 20 years and require some type of monthly or quarterly
payment, Lee, (1996).
According to Owuor, (2008) perhaps the main advantage of a long-term loan is that the company
that is taking out the loan will have the choice of approaching a large number of lenders when
seeking the loan. Each of these lenders may be willing to accept different terms for the loan. This
can lead to a lower interest rate or a flexible payment structure. This is in contrast to the relative
rigidity of the bond market. Wheeler, (2002), one of the chief disadvantages of long-term loans is
that many banks are unwilling to issue loans to businesses at a fixed rate of interest for a long
period of time. This means that the borrower will end up having to a pay a variable rate of
interest, one that will fluctuate with changes in the market rate. If interest rates skyrocket, the
cost of the loan can become very high.
According to Nyikal, (2000) because a long-term loan's repayment period spans a greater period
of time than a short-term loan's, you can borrow a greater amount. Borrowing more money from
the bank gives you far greater immediate purchasing power than borrowing a small amount and
saving up the remainder required to make a large purchase. This is particularly beneficial for
businesses that need an influx of cash quickly to stay afloat.
Long-term bank loans require applicants to meet strict financial and credit criteria that are not
always necessary with short-term loans. According to Trivelli, (2008), the application process is
often lengthy and the applicant must prove his ability to repay the loan through thorough
financial documentation before the bank will consider approving the application. Depending on
the type of long-term loan an individual or business applies for, the bank may require collateral
in the form of a security interest in the applicant's assets. Should the applicant fail to repay the
loan, the bank may then seize the asset by calling due its security interest.
According to Trip, (1998) a long-term bank loan provides an applicant with lower payments than
a short-term bank loan for the same amount. Thus, while the applicant could feasibly pay off her
liability more quickly with a short-term loan, the lower payments she enjoys via the long-term
loan make incorporating loan payments into her budget an easier task. Barring interest charges, a
short-term bank loan of $10,000 repaid over a six-month period leaves the borrower with
payments totaling over $1,500 a month. Sharma, (1998) further asserts that a four-year bank loan
for the same amount, also barring interest, leaves the borrower with more manageable payments
of approximately $200 a month.
According to lee, (1996) interest rates vary depending on the type of loan the applicant applies
for and whether the applicant meets the bank's qualifications for the best rates. What does not
vary, however, is the fact that the longer the loan term, the more interest the borrower pays over
the life of the loan. In general, interest rates are slightly higher for long-term bank loans than for
short-term bank loans. Borrowers can often reduce their interest rates by providing the bank with
collateral. This reduces the bank's risk of loss and allows the borrower to take advantage of lower
rates.
As compared to other conventional loans, such loans have a shorter repayment term. Therefore,
the interest rate tends to be a little higher. However, if you were to calculate properly, you would
notice that you would be paying much lesser when compared to the long-term loans.
According to Michael, (2006) short-term loans are good for people with a bad credit score. A bad
credit score affects a person from availing further loans. However, with short-term loans, you
can repay your existing debts and improve your credit score. It does not take a lot of time to
approve such short-term loans. For the most part, the banks would approve these loans within 2-
3 business days. In addition, since the loan amount is less, there are no elaborate forms involved.
The process is quite simple and hence people prefer such loans in times of a financial crisis. For
people with outstanding debts, short-term loans can help you make your payments on time, to
avoid further dents on your credit.
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