What are loan terms?

Loan terms explained

Loan terms spell out the details of a loan. Since loan agreements are legally binding, it’s crucial to understand a loan’s terms and conditions before borrowing money. Failure to follow them could result in financial penalties, such as added loan interest and fees. Your credit score can also take a hit.

While loan terms can include almost everything in your loan agreement, we’ve explained three of the most important loan terms below.

Personal loans often have repayment periods of 12 to 60 months.

1. Term length

A loan’s term length — also called its repayment period — is the amount of time you have to pay back what you’ve borrowed. As a general rule, for a given loan amount — the longer the term length, the lower your monthly payment.

Term lengths vary depending on the lender and the loan product you choose. Personal loans often have repayment periods of 12 to 60 months, though longer terms are sometimes available.

2. APR and interest rate

The Consumer Financial Protection Bureau has defined annual percentage rates (APRs) as “the cost you pay each year to borrow money, including fees, expressed as a percentage.”

Technically, your interest rate only reflects the cost you pay each year to borrow money and doesn't include any other required fees or payments. Your APR includes the interest rate plus any fees you pay to secure the loan. This is why APR is typically higher than the noted interest rate. Personal loan lenders usually offer fixed interest rates rather than variable interest rates.

3. Repayment details

Your term length, APR and loan principal influence how you’ll repay your loan, but there are also specific terms regarding your recurring payments, including the:

• Minimum payment: How much you must pay each period
• Distribution: How much of each payment goes to the principal and how much goes to interest
• Due date: When your payment is due each period (some lenders let you choose a due date that aligns with your payday)
• Late fees: How much you owe if you miss or make a late payment
• Frequency: Usually monthly —biweekly payments may help you pay down debt faster, but some lenders charge a fee or require that you’re ahead on payments — a reviewer from Florida said they had to be two months ahead to enroll in biweekly payments on their loan

Common types of loan terms by category

Understanding loan terms by category can help borrowers know what to expect and make informed comparisons.

Personal loan terms

• Typical term lengths: 12 to 60 months
• Interest rates: Usually fixed, often based on creditworthiness
• Fees: May include origination fees, prepayment penalties and late payment fees
• Use cases: Debt consolidation, major purchases or unexpected expenses

Mortgage loan terms

• Typical term lengths: 15 or 30 years (fixed-rate); ARMs may offer 3/1, 5/1 or 7/1 terms
• Interest rates: Fixed or adjustable; initial fixed period followed by rate adjustments with ARMs
• Fees: Closing costs, mortgage insurance, property taxes and escrow fees
• Use cases: Home purchase, refinance or home equity

Auto loan terms

• Typical term lengths: 36 to 72 months (sometimes up to 84 months)
• Interest rates: Fixed; influenced by credit score and vehicle type (new or used)
• Fees: May include processing fees, dealer fees and prepayment penalties
• Use cases: Financing new or used vehicles

» MORE: RV loan terms

Term loans

It’s easy to conflate “loan terms” and “loan term” (the singular typically refers to the repayment period) — and, to complicate matters further, you might also hear about “term loans.”

Term loans are loans with set repayment periods typically granted to small businesses. Businesses commonly use term loans to purchase fixed assets, such as equipment or a new production facility.

Bottom line: How to get the right loan terms for you

The right loan terms look different for different borrowers. If your monthly budget is tight, first determine what you can afford, then try to find the lowest interest rate you qualify for. All else being equal, you'll owe less each month with a loan that has a longer term, but you’ll spend more overall. If you have flexibility in your budget, it’s smart to look for low interest rates and the shortest loan term you can afford.

If you’re struggling to get your desired loan terms, you aren’t out of options. Some ways to improve your candidacy include building your credit score and adding a co-signer, if applicable.