Difference Between Short-Term & Long-Term Intermediate Loans

Video Transcript

"What's the difference between a short term and a long term loan? In other words what's the definition of short term versus long term? Well it kind of depends on what your perspective is. For a lot of people, a 30 year mortgage seems to be a long term loan and they'd be right. Most people don't even stay in a home 30 years, the typical turnaround time on a house right now is probably 6 years and so why would I want to get a 30 year guarantee on my interest rate if I'm only going to stay in the house 6 years? Well, things can change. The interest rate on a 30 year loan is a little bit higher than the interest rate on a 15 year loan for a home mortgage. Why is it that way? Well because they're giving you a longer guarantee. Some people bought into the idea of getting an adjustable rate mortgage where the interest rate rises and falls along with the prime or some other index. For those people right now, they're basking in glory because interest rates are extremely low, their adjustable rate loan is down to 3.25, 3.5%, something like that. At the same time there's a risk that they're incurring because when interest rates come back up in a couple of years which they will do, they're going to be paying a much higher interest rate. As long as you have the financial reserves and you're financial house in order otherwise, IE you have an emergency fund and you have savings put away, so on and so forth, there's nothing wrong with getting a short term interest rate, OK? But we all know that not everybody's in that situation. The best advice I can give you is try to minimize the number of credit cards you have, those are short term, try to minimize the number of car loans you have. If you have two open credit cards that you use for your regular business dealings, buying things and going about your business, that would be sufficient to get you a good credit score. And then if you had two short term IE type car loans, that would help your credit score. I didn't make these rules, that's just the way credit scoring agencies look at things. You'd like to have two open lines of credit as far as credit cards, a couple of closed end short term loans like car loans, they don't have to be big as long as you're paying on them regularly, and then of course you're going to have your longer term financing like you have on like a mortgage. So that's the difference between short term and long term financing."