Difference between Long Term and Short Term Interest Rates
Running a business successfully is not a job for everyone, especially when it comes to multi-national or corporate organisations. Finance is the key to every business’s survival, expansion and diversification. In today’s dynamic world, a business needs to adapt to the economic condition proactively if it is to survive the hyper competition. Either for expansion or diversification, a business will need finance to achieve its goals. There are a number of ways to obtain finance for your business and loans are the most commonly opted choice by individuals. You will have to pay a certain amount of interest on the loan you take. However, you also have to decide whether you need long-term loan or short-term loan for your business. Both types of loans will have different interest rates. Normally people think long term and short term interest rates merely relate to time period. However, there are many other differences between these two types of interest rates.
Long term interest implies upon a long-term loan taken from a bank or any other financial institution which normally lasts for more than five year. This interest rate is higher than the short term interest rate, as the lender bears more risk of keeping his/her money bound to the loan taker for a longer period of time.
Short term interest rates relate to short-term loans, which are taken for less than two years’ time. These interest rates are relatively lower than the long term interest rates.
Instructions
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Long Term Interest Rate
Lending money to someone over a period of more than five years involves a lot of risks. It is these risks, the changing economic conditions and inflation factor which contribute to increase the long term interest rate. This interest rate if directly related to the economic conditions and changes in the inflation rate of a country. Long term interest rates do not influence the economy of a state but serve as a benchmark to determine the strength of a country’s economic conditions.
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Short Term Interest Rate
The Federal Revenue System controls and measures the short term interest rates in the United States. This governing body is also entitled to control the inflation within the states. It is the short term interest rate which affects the economy of a state. Lower short term interest rates can drive the economic machinery of a country by promoting economic growth in a steady manner, creating opportunities for smaller businesses to take advantage of cheaper finance for expansion.
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