What Are Loan Terms?
Loan terms can have a couple of different meanings. On one hand, it can refer to how long you’ll be paying off your loan. On the other, it also refers to the details of your loan (or terms and conditions), like your monthly payment amount, your due date, your interest rate and any other finance charges.
Understanding your loan’s terms is critical so you can make sure you pay back your loan in a timely manner and that you’re getting the best deal.
What Are Loan Terms?
If you pay attention to little clues in how people talk about loan terms, you can often tell what someone’s talking about.
If someone’s talking about the “loan term” (singular), they’re usually referring to the term length—how long you have to repay the loan.
If someone’s talking about the “loan terms” (plural), they’re generally talking about all the details that make up your loan, including how much you’ll owe each month, when your payment is due and your annual percentage rate (APR).
Loan Terms Definition: Term Length
When you take out a loan, you’ll pay it back slowly over time through monthly payments. At some point, you’ll have repaid the entire loan and you’ll be free of the debt. The amount of time the lender gives you to repay your loan is called the term length, or your “loan term.”
Here are common loan term lengths:
- Auto loans: The average car loan is now six years, according to Experian. Most lenders offer auto loans in 12-month increments from two to eight years.
- Personal loans: You can typically get a personal loan with terms between three and five years. Some lenders offer personal loans as short as six months or as long as 12 years, but these might be harder to find.
- Student loans: 10-year terms are most common, although they can range up to 30 years in some cases, like consolidation loans.
- Mortgages: 30-year mortgages are most common, but 15-year mortgages are also available.
When you’re shopping for loans, you’ll generally get a range of term lengths to choose from, which depends on two factors: your creditworthiness and what is available through the lender. The longer the term length, the smaller your monthly payment, so it’s tempting to stretch your loan out as long as possible.
However, if you can and if you’re able, it’s always best to choose the shortest-term loan with monthly payments you can afford. There are two reasons for this: you’ll be out of debt sooner, and you’ll save a lot more money over time. That’s because while stretching your loan term out shrinks your monthly payments, it actually increases the amount of interest you pay over time.
Loan Terms Definition: Terms and Conditions
“Loan terms”—plural—is generally a shorthand way to refer to your loan’s terms and conditions. These are all the rules that define how your loan works. The loan agreement you sign when you accept your loan outlines these rules.
The most important loan terms for you to know are:
- Annual percentage rate (APR). This measures how expensive your loan is by combining your interest rate and any finance charges into one figure. You can use this to shop around and compare different loan options.
- Monthly payment. How much you’ll pay each month to your lender. Some of this goes toward paying down your loan’s principal amount and some goes toward paying down your interest.
- Fees. This can include fees such as origination fees, application fees, late fees or prepayment penalties.
- Due date. This is when your payment is due each month. If you don’t pay it on time, your loan agreement outlines what will happen, such as when your lender will charge you a late fee.
- Term length. This is the amount of time you have to repay your loan, as discussed above.
How to Negotiate Your Loan Terms
It’s also crucial to know your loan terms because, if you play your cards right, you can actually negotiate a more favorable loan. Some lenders offer a prequalifcation process, which lets you see what your terms would be prior to submitting your application. Prequalifying with multiple lenders will give you more data points, making it easier to compare and find the best offer.
But that’s not the end of your negotiation. Once you find the best offer for your needs, you may be able to use it as a bargaining chip to get an even better offer. You can take that offer back to the other lenders you previously prequalified with and see if they can offer better terms here bridgepayday.com/`s
While you can use this strategy to negotiate your loan terms on any type of loan, it’s especially powerful for mortgages and car loans. Because mortgages have large dollar amounts, even a tiny adjustment to your offer can save you hundreds or even thousands of dollars by the time you pay your house off.
And if you buy your car from a dealer, there are often financing departments that are especially easy to negotiate with. That’s their whole job, after all, and there’s already an established precedent for negotiating car prices.