Term

Term summary:

• A term is how long you'll have to repay a loan or line of credit. 

• Mortgages, home equity loans, HELOCs, personal loans, and car loans are examples of loans that have specific repayment terms. 

• Credit cards are open-ended, which means there's no set repayment term. 

Term definition and meaning

When you get a loan, the lender will tell you how long you're expected to make payments. This period is your loan term. 

Your loan term makes a difference in what you pay monthly and how much interest you pay in total. Some loans have shorter terms that last a few months to a few years, while others may stretch out repayment over decades. 

The type of loan you get influences the range of terms a lender offers. 

Key concept: The term is the repayment period of a loan.

More on term

When you need cash for large expenses, debt consolidation, or emergencies, it's natural to consider loan options. Personal loans and home equity loans, for example, could put money in your hands to meet a variety of needs. 

One thing to consider before you borrow is what loan term best fits your situation. Your term is how long you'll have to pay back what you borrow. 

Term: a comprehensive breakdown

A loan term is the number of months or years that you make payments to a lender. Your repayment term should be spelled out in your loan agreement, along with your interest rate and any fees you'll pay. 

Loans can be short-term or long-term. Short-term loans are usually meant to be paid back in a year or less. Examples of short-term loans include:

• Buy now, pay later (BNPL) agreements

• Short-term personal loans

• Payday loans

• Cash advances

• Title loans

• Pawn loans

Short-term loans usually charge interest and fees. The type of loan and the lender determine what you'll pay. 

Long-term loans have repayment terms that stretch beyond one year. Examples of long-term loans include:

• Most personal loans

• Student loans

• Car loans

• Mortgages

• Home equity loans

• Home equity line of credit (HELOC)

With long-term loans, you might get anywhere from one to 30 years to pay back the loan. 

Credit cards don't have a set repayment term since your balance could change from one statement period to the next. You'll have to make the minimum payment each month, but it's up to you to decide if you want to pay more than that. 

Is a longer or shorter loan term better?

The term makes a difference because it affects some key features of the loan, including your:

• Monthly payment amount

• Interest rate

• Total interest paid

Whether you go with a shorter term or a longer one, it helps to know what it means for you. 

Short-term loans sometimes offer lower interest rates, which means you pay less interest over the life of the loan. You'll pay the loan off in less time, but you'll have a bigger monthly payment. 

A long-term loan, on the other hand, means less of a squeeze on your budget since the payments are lower. The trade-off is that a longer term usually means more interest paid altogether. 

Good credit could work in your favor with long-term loans. For example, if you want to get a 30-year HELOC, having good or excellent credit could help bring your rate down. 

Pro tip: You don’t have to double the payment to cut the term in half. 

That’s because interest is heavily affected by time. In other words, the term. Here’s an example of the payment amount and total cost of a $100,000 loan with a 10% interest rate, with two different terms:

The longer term has a lower payment but a higher overall cost. If you can afford to take a shorter term and a payment that’s about $200 higher, you could save more than $122,000 in interest charges.

Research can help you find the best loan option. You can compare terms, rates, and fees to find out which loan checks off the right boxes for you. Use a loan repayment calculator to get an idea of what your payments might look like with different interest rates and terms.