What Is a Loan Term?

What Is a Loan Term?

A loan term is the length of time over which a loan is scheduled to be repaid. Common terms are 30 years and 15 years for mortgages; 36, 48, 60, or 72 months for auto loans; and 12 to 84 months for personal loans. The term directly determines your monthly payment and total interest paid.

How Loan Term Affects Monthly Payment

Longer terms produce lower monthly payments because the principal is spread over more periods. Shorter terms produce higher monthly payments. On a $200,000 loan at 7%, a 30-year term produces approximately $1,331 per month. The same loan on a 15-year term produces approximately $1,797 per month.

Auto Loan Example: $30,000 at 7%

A 36-month term costs $926.31/mo with $3,347 total interest. A 72-month term costs $511.47/mo with $6,826 total interest -- $415/mo less, but more than double the total interest paid.

How Loan Term Affects Total Interest

Longer terms dramatically increase total interest. On the mortgage example above, the 30-year loan produces total interest of approximately $279,000. The 15-year loan produces approximately $123,000 -- a difference of approximately $156,000 in exchange for a $466 lower monthly payment.

Choosing the Right Term

A common approach for mortgages is to take a 30-year loan for payment flexibility but make extra principal payments to shorten the effective payoff date. This combines the safety of a lower required payment with the interest savings of faster paydown.

Common Loan Term Mistakes

Choosing the longest term for the lowest payment. As shown above, extra years can more than double total interest.

Not checking whether a longer term also carries a higher rate. Some lenders price longer terms higher, compounding the added cost.