Loans can last for any length of time that’s agreed upon by the lender and the borrower.
Alternate definition: Loan terms can also be factors like the interest rate and other requirements that the loan contract provides forAlternate name: Terms and conditions
How a Loan Term Works
Your lender typically sets a required monthly payment when you take out a loan, such as a 60-month auto loan. That payment is calculated so that you pay off the loan gradually over the loan’s term. Your last payment will exactly cover what you owe at the end of the fifth year. This process of paying down debt is called amortization. A loan’s term affects your monthly payment and your total interest costs. A long-term loan means you’ll pay less in principal each month because the total amount you borrowed is broken down over more months, so it can be tempting to choose one with the longest term available. But a longer term also results in more interest charges over the life of that loan.
Other Types of Loan Terms
Loan terms can also be the characteristics of your loan, which your loan agreement would describe. You and your lender agree to specific conditions—the “terms” of your loan—when you borrow money. The lender provides a sum of money, and you repay that sum according to an agreed-upon schedule. Each of you has rights and responsibilities per the loan agreement if something goes wrong.
Loan Terms vs. Loan Periods
Loan periods are also related to time, but they aren’t the same as your loan term. A period might be the shortest period between monthly payments or interest charge calculations, depending on the specifics of your loan. In many cases, that’s one month or one day. For example, you might have a loan with an annual rate of 12%, but the periodic or monthly rate is 1%. A term loan period can also refer to times at which your loans are available. For student loans, a loan period might be the fall or spring semester. Your monthly payment is often calculated based on the length of your loan and your interest rate. There are several ways to calculate the required payment. Credit cards might calculate your payment as a small percentage of your outstanding balance. Minimizing interest costs is often wise. You’ll lose less money to interest charges if you can pay off your debt faster in a shorter loan term. Find out if there’s any penalty for paying off loans early or for making extra payments so you can pay it off before the set loan term ends. Paying more than the minimum is smart, especially when it comes to high-cost loans like credit cards. You don’t pay down the balance gradually with some loans. These are called “balloon” loans. You only pay interest costs or a small portion of your loan balance during the loan’s term. You’ll then have to make a large balloon payment or refinance the loan at some point.
