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What are loan terms?

What to know before you borrow

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Written by Sarah Goldy-Brown
Edited by Cassidy McCants

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    Loan terms are the details of your loan agreement, including how long you have to repay your loan, your interest rate, your payment requirements and any other fees or stipulations.

    Loan terms determine everything from how expensive it is to borrow money to how long you’ll make payments, and they can apply to any type of loan, whether it’s a mortgage or a personal loan. If you understand how loan terms work and their significance, you can make better borrowing decisions.


    Key insights

    • When people say "loan terms," they’re generally referring to the specific rules, definitions and conditions of your loan, but the singular "loan term” usually refers to your repayment period. Don’t confuse the two.
    • Loan terms to be aware of include your term length, annual percentage rate (APR) and repayment details.
    • Loan terms are often the most important factors to consider when comparing loan options.

    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 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.

    Fixed interest rateVariable interest rate
    How it worksInterest rate remains the same throughout the life of the loanRate is tied to a benchmark or financial index; can change throughout the life of the loan
    How often does it change?NeverAs often as monthly, quarterly or annually
    Primary benefitConsistent monthly paymentsGenerally have a lower starting rate
    Primary drawbackGenerally have a higher starting rateMonthly payments could go up

    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

    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.

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      FAQ

      How often does a variable interest rate change?

      Variable interest rates can change monthly, quarterly or annually. Rate increases or decreases are based on the financial index or benchmark the loan is tied to.

      However, some loans with variable interest rates, like adjustable-rate mortgages, commonly feature an initial period where the interest rate is fixed and will not change at all. Once this period is over, though, the interest rate will begin to fluctuate like any other variable interest rate.

      What kind of loan can I get?

      The type of loan you can get depends on a number of factors, such as your reason for the loan, the loan amount, your creditworthiness and whether you meet other lending criteria.

      What are the different types of loans?

      There are many types of loan products out there, including but not limited to:

      • Personal loans
      • Auto loans
      • Student loans
      • Mortgages
      • Home equity loans
      • Credit-builder loans
      • Debt consolidation loans
      • Payday loans
      • Small business loans
      • Title loans

      There are also so-called family loans and friendly loans, where you borrow money from people you know. These are often less formal than loans from traditional lenders, but they can come with their own terms you should be aware of.

      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.


      ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. To learn more about the content on our site, visit our FAQ page.
      1. Consumer Financial Protection Bureau (CFPB), “What is the difference between an interest rate and the Annual Percentage Rate (APR) in an auto Loan?” Accessed May 4, 2022.
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