Repayment Period

Repayment period summary

• The repayment period is the time you have to repay a loan.

• The longer you take to pay off a loan, the more you’ll pay in interest.

• Many loans allow early repayment without penalties.

Repayment period definition and meaning

The repayment period is the time you have to repay a loan. For example, if you finance a five-year loan, your repayment period is five years. Many loans allow you to repay the loan sooner if you'd like, without penalty.

The type of loan you take out helps determine the repayment period. For example, auto loan repayment periods typically range from three to seven years. The repayment period on a home equity line of credit (HELOC) is typically 10 to 30 years. 

The repayment period impacts your monthly payments and the total amount of interest you pay over the life of a loan. Extended repayment periods lead to lower monthly payments but usually result in higher total interest costs. Shorter repayment periods mean higher monthly payments but could save you a lot of money in interest. 

Key concept: Your repayment period is the agreed-upon period during which you'll make principal and interest payments to the lender to pay off the loan according to the terms.

More about repayment periods

Repayment periods are often associated with HELOCs. A HELOC has a draw period, followed by the repayment period. The draw period typically lasts from five to 10 years. The repayment period on a HELOC could be up to 30 years.

During the draw period, you can borrow, repay, and borrow more, up to your credit limit, as often as you like. Let’s say you have a $100,000 credit limit but you want to do a remodel that costs $125,000. You could borrow the full amount, repay $25,000 over time, and then borrow another $25,000 (as long as you’re still in the draw period).

Once your draw period ends, you can’t borrow more. You’ll enter the repayment period. Your payments will be calculated to fully pay off your loan by the end of your repayment period.

Repayment period: a comprehensive breakdown

During the repayment period on almost any loan, you can expect to pay interest, computed on the unpaid loan balance. The lower the principal balance, the lower the amount that goes toward paying interest each month.

Taking a longer repayment period could keep your payments lower. But in the long run, that decision could cost you more. 

Say you take out a $20,000 personal loan with a 16% interest rate to consolidate debt. Here’s the cost difference between three years and five years.

The lower payment fits comfortably in your budget, but could you find another $200 per month? Making a larger payment for a shorter time means you'd save almost $4,000 in interest. That's $4,000 you could use to build an emergency savings account, save for a home, or enjoy a nice vacation.