What is a term?
A term is a period of time. Generally, it represents a period of time until a loan or any type of deposit or investment achieves maturity. Terms can be expressed in months or years, depending on the details of the account or loan.
When obtaining a loan, a consumer borrows money to make some type of investment or purchase. The individual borrows the money for a specific amount of time. This amount of time is also known as the term of the loan. The same applies to an investment, such as a certificate of deposit. The individual deposits money into an investment for a period of time. That time is also known as the deposit term.
The term stipulates the amount of time that the investment or loan will be in place. It is based on the repayment schedule or investment schedule set by the parties upon entering into the agreement.
In loans, a variety of term types exist. An intermediate term is any loan that runs no longer than three years. This type of loan is often for businesses and it requires a monthly payment, but may have a balloon payment incorporated into it. A long-term loan is typically one that extends up to 25 years. This type of loan is nearly always asset-backed, or backed by some type of collateral.
Julie and Frank plan to buy a house. They work out the details of the mortgage with their lender. They agree to a 30-year loan. In this situation, the term of the loan is 30 years, meaning they will make monthly payments on the loan to their lender for the next 30 years.
Use our amortization schedule calculator to see how important the loan term is when figuring out the cost of taking out a mortgage.