A loan term is the length of time you have to repay your loan. Loan terms can vary greatly depending on the lender, the type of loan, and the terms and conditions.
Bear in mind that loan term sounds similar to other terminology that also pertains to loans. While this page covers what a loan term means, our FAQ below deals with these easily confused phrases.
Does the repayment period really make that big of a difference? You might be tempted to always take the option that gives you the lowest monthly payment, but that ends up costing you a lot more by the time you're done paying off the loan.
Let's look at an example. Nicole and Ernie each want to take out a $5,000 loan. They both get approved for the same interest rate of 4.5%. But they each commit to a different loan term based on what looks best for them, and that's where things get interesting.
Nicole looks at her monthly budget and agrees to repay the loan over five years. Her monthly payment is $93.22.
Ernie isn't sure about that monthly payment. He discovers he can lower his payments by extending the term of the loan, so he does that. He agrees to spend eight years paying off the loan. Ernie's monthly payment is only $62.12.
Where will Nicole and Ernie be after they're both done repaying their loans? There's a significant difference. Nicole will end up repaying a total of $5,592.91. Ernie will repay $5,963.15.
Remember that they both received the same $5,000 loan—but Ernie ends up paying hundreds of dollars more over the course of three more years.
Not to be confused with the term length for a loan, loan terms is sometimes used as a shortened form of the phrase loan terms and conditions. The terms and conditions for any loan are absolutely crucial—they spell out everything you need to know, including the interest rate, the loan repayment period, and the consequences of nonpayment.
Term loans are generally sought by small businesses that need cash upfront to purchase equipment, supplies, and other resources necessary to keep their business going. Banks set these loans up to meet the particular needs of small businesses, which usually take several years to consistently turn a profit.
Loan repayment periods are often presented in months instead of years. This may be because short-term loans can have a repayment period of less than 12 months, so referring to all loan terms by the month is more consistent. It's also a good reminder for the borrower since the loan term in months tells them how many payments they'll be making over the life of the loan.
If you prefer to think in terms of years, simply divide the total number of months by 12. For example, 60 months is another way to say five years.
