Explanation of loan terms. The term loan can refer to several things. In most cases, the term is one of the following: How long the loan will last if you make the minimum payments each month. Characteristics of a loan that you agree to be sometimes referred to as terms and conditions.
Time as a loan term
The first example is about time: how long will the loan last (until it is fully paid off with regular payments)?
It can last the entire term. Loans can be short-term loans or long-term loans.
The term loan can be easily identified. For example, a fixed-rate mortgage of 30 years has a term of 30 years. Car loans often have a maturity of 5 or 6 years, although there are other options (car loans are often quoted in months, such as 60-month loans). However, the loans can take longer than the lenders and borrowers are willing to agree on.
Sometime before the end of the loan, the loan must be repaid or refinanced. When you get a loan (such as a 5-year car loan), you often have a mandatory monthly payment. This payment is calculated so that you will pay off the loan in full over the life of the loan. At the end of the fifth year, your last payment will cover exactly what you owe. The process of paying off debt in this way is called amortization.
Why it matters: The duration of a loan is important: It affects your monthly payment and your total interest expense.
Longer-term means you will pay less each month – so it is tempting to take loans with the longest available term (for example, you may be drawn into a 72-month loan instead of a 60-month loan). However, a longer-term also means that you will pay more in interest over the life of that loan. In other words, you pay more for what you buy (the price does not change, but the amount you pay).
Loan Periods: Loan periods are also related to time, but they are not the same as your term. Depending on how the language is used, the period may be the shortest period of time between monthly payments or interest calculations. In many cases, it’s a month. For example, you may have a loan at an annual rate of 12%, but the periodic (or monthly) rate is 1%.
The term of the credit period may also refer to the time at which these loans are available. For student loans, the loan period can be eight or spring.
Loan terms and conditions
The terms of the loan may also be characteristics of your loan, which are described in your loan agreement. When you borrow money, you and your lenders agree to certain things – the “terms” of your loan.
They will give you a chance to make money, you have paid off according to an agreed schedule, and if something goes wrong, each of you has the rights and responsibilities set out in the loan agreement.
Below are some common terms that need to be addressed.
Interest rate: How much interest is charged on your credit balance each period. The higher the rate, the more expensive your credit is. It is also important to find out if your loan has a fixed interest rate or a variable rate that may change at some point in the future.
Prices are often quoted in terms of the annual percentage rate
(APR), which could incur additional costs other than interest costs.
Monthly payment: Your monthly payment is often calculated with the length of your loan and the interest rate. However, there are different ways to calculate your payment required (for example, credit cards are often calculated based on small percentages of your balance). Make sure you know how much you will pay each month and if that amount ever changes. You need to make sure the payment is factored into your budget.
Calculation penalties: Reducing interest costs is often a good idea. If you can pay off your debt faster than necessary, you will avoid wasting money. Find out if there is any penalty for paying off your loan early or making additional payments. Especially when it comes to high costs such as credit cards, paying more than the minimum is wise.
Balloon Payment: Some loans are not paid overtime – you only pay interest or a small portion of your loan. Unfortunately, this means that at some point in the future, you will need to make a big balloon payment (or refinance your loan with another major loan). Make sure you know about this long before the payment is due.