When taking on debt, it’s smart to consider the lifespan of what you’re buying. Long-term loans, loans that are 5 years or longer, should be reserved for purchases that will last at least as long as the loan period, like a house or a car. These investments hold value over time and justify the extended repayment period.

What does it all mean?

Short-term loans are considered 1-2 years in length, medium-term loans are considered 2-5 years in length, and long-term loans are considered 5 plus years in length. An example of an appropriate loan match would be a long-term loan on a vehicle or house. What we don’t want to happen is to have a short-term expense on long-term loan. Let’s say you go on vacation and put it on a credit card, but you are only able to pay the minimum payment each month, which then takes you 5 years to pay off. The reason this causes a strain on finances is because when you want to take a vacation next year, you can’t. You are still paying off the old vacation. Or you may choose to put this year’s vacation on a different credit card. You can see that when putting short term expenses on long term loans, the ultimate outcome is an unhealthy debt cycle that is difficult to break.