OppLoans Word of the Week: Term

word of the week - term

When it comes to personal lending, the term of the loan is pretty simple: it’s the length of time a borrower has before the loan has to be repaid. That’s it! A payday loan with a 14-day term has to be repaid in two weeks. An auto loan with a five-year term has to be repaid in … You guessed it: Five years. And a 30-year mortgage? It’s right there in the name, isn’t it?

Is the Term important?

Yes. For something that’s so incredibly simple, a loan’s term can be massively important. The length of a loan’s term often determines not only when, but how the loan is going to be repaid. It could be the difference between a loan you can afford and a loan that leaves you trapped in debt.

There are two basic kinds of loan terms: short-term and long-term. Let’s look at the differences.

Short-term

These are loans with terms under six months. In this category you’ll generally find payday loans, which average 14 days in length, as well as title and pawnshop loans, which are generally one month long. Because the terms for these loans are so short, they are usually designed to be repaid in a single lump sum. That means that the borrower doesn’t have to make any payments until the loan’s due date. But once that due date rolls around, the entire amount owed is due, including both the principal and the interest.

For this reason, many borrowers find lump sum repayment difficult. Instead of paying their loan off in a series of smaller, more manageable chunks, they have to come up with the money all at once. And when the terms of the loan are so short, this makes it doubly hard. This is why lots of people end up rolling over their short-term loans and paying additional interest in order to secure an extension on their due date. Maybe these loans aren’t so short-term after all!

Long-term

These are loans with terms longer than six months. They include most personal loans, auto loans, and mortgages. The vast majority of these loans are referred to as “installment loans” because they are designed to be paid back in installments. And rather than requiring that the loan be paid back all at once on the due date, these loans make repayment far more manageable for borrowers by requiring them to pay it back a little bit at a time. Payment is typically due once a month.

With long-term loans, the length of the term can also determine how much the loan costs overall. A loan with a longer term will usually have smaller monthly payments, but it will also cost more than a similarly sized loan with a shorter term. This is because a loan with a longer term will accrue interest for a longer period of time. The more interest that accrues, the more a borrower is paying on the loan. This is especially important to take into account when considering debt consolidation loans.

You can read more about Terms in our Financial Terms Glossary.

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