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What Does Term on a Loan Mean?

What Does Term on a Loan Mean?

The term is the amount of time it takes to pay off the loan; usually in months. For example, 4 years would be 48 months (4 years times 12 months).

By way of illustration, let’s say Brock is approved for an installment loan he plans to use towards the balance on a new car he is buying. If he has a loan term of 3 years, the term of the loan in the agreement likely says he will pay on it for 36 months (3 years times 12 months).

The term of the loan allows for the lender to build an amortization repayment schedule based on the minimum payment a borrower will owe per month. In the example above, the schedule will factor in how many months Brock has agreed to pay on the loan; how much of that payment goes towards interest; and how much of the payment goes towards the principal. Should he make regular payment during the term of the loan, not miss any payments, and not making any additional payments towards the balance, the loan and interest accrued will be paid off in 3 years (or 36 months).

Borrowers should always be aware of the term of the loan so they know what to expect for the duration of it and can anticipate the upcoming end date in their budgeting and financial plans.

Financial Terms and Definitions