What are loan terms and conditions?
Typically, loans carry specific terms and conditions that the borrower must meet. When taking out a loan a person has agreed to the terms and conditions from the borrower. Loans have several components including loan duration, interest rate, payment structure, fees and penalties. Loans can be either secured or unsecured. Secured loans are tied to an asset like auto loans or mortgages and can have lower interest rates. In the event that the borrower fails to make payments that lender has the right to repossess that asset. Unsecured loans can have higher interest rates because the lender is taking on more risk.
Common Repayment Period Lengths
Repayment period lengths vary depending on the type of loan and what the borrower can afford. The repayment period lengths are divided into short term and long term categories. For personal loans, the repayment periods can vary between 12 months to 84 months. Short term personal loans typically span 1-3 years and have higher monthly payments and lower interest rates. Long term personal loans generally last 4-7 years. Usually they are lower monthly payments but you end up paying more interest over time.
Auto loan repayment periods typically range from 36 months to 84 months. Auto loans that fall within 36 – 48 months have higher monthly payments but they align more closely with a car’s rate of depreciation. Long term auto loans range between 5-7 years. This allows for more affordable payments however you end up paying more interest over time.
Common repayment periods for home mortgages are 15, 20, 25, 30 and even 40 years of monthly payments. Home buyers that can afford higher monthly payments may choose 15 year mortgage loan terms to save on interest. They end up building equity quicker. The most common type of mortgage repayment period length is 30 years. Typically this loan term has lower monthly payments however more interest is paid over the life of the loan.
Student loans are different from other types of loans we have discussed in that it involves a grace period. In most cases after a student graduates payment periods begin after a 6 month grace period. When the grace period ends, the repayment period begins. The length of the repayment period depends on the amount borrowed and repayment plan chosen. Common repayment periods are 10, 15, 20 and 25 years. For federal student loans the standard length of payments is 10 years. This allows for faster repayment along with reduced interest payments. Extended student loan repayment plans range from 20-25 years, they allow for lower monthly payments. As a result more interest ends up being paid on the loan.
Short vs. Long Term Loans: What’s the Difference?
As previously discussed the terms of the loan depends on what the borrower is prioritizing. Do they want lower monthly payments? Lower interest? Or simply income driven to pay off the loan fast? Short term loans can be beneficial for borrowers that have the means to pay off loans fast and aim to pay less interest over time. The downside is higher monthly payments. In contrast, long term loans have lower monthly payments. As a result more interest ends up being paid in the long run.
How Loan Terms Affect the Cost of Credit
The amount of money that is paid in total is determined on the length of the loan. Loans are structured with interest rates that lenders benefit from. The longer the loan the more monthly interest payments are paid to the lender. Cost of credit refers to the total expenses charged to the borrower. This includes anything beyond the principal balance that was charged to the borrower including interest, fees, and services charges.
Long loan terms affect the cost of credit resulting in interest accumulating over time. You end up paying more interest in total over time during the duration of a longer loan term. In some instances borrowers can pay double than what was borrowed because of interest. In contrast, short term loans accumulate less interest. Short term loans allow borrowers to pay off the principal balance quicker thus less interest is paid over time.
Summary
The types of loans and duration of term impacts the total cost of credit for a borrower. Loan terms like repayment period, interest rate, fees, and whether the loan is secured or not impact how much money you pay over time. In addition the loans like personal, auto, student loans and mortgages all have varying average repayment periods. Depending upon the financial situation of a borrower short term and long term loans have different pros and cons. Long term loans extend the amount of time interest accumulates during the duration of the loan. Short term loans lessen that duration, lowering the amount of costs over time.
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