Loan term

What It Means

A loan term is the length of time you have to pay a loan back in full. Car loansCar loanAn installment loan used to buy a vehicle, repaid in monthly payments over a set term, with the vehicle as collateral. See more usually state it in months, such as 48 or 72, and mortgagesMortgageA loan used to buy or refinance a home, secured by the home itself and repaid in monthly installments over a set term. See more in years, most often 15, 20 or 30, according to the Consumer Financial Protection Bureau (CFPB). At the same interest rateInterest rateThe yearly percentage a lender charges for borrowing money, not counting fees; the APR adds certain fees to show a fuller cost. See more, a longer term gives you a smaller monthly payment and a bigger total interest bill, because the balance takes longer to come down.

How People Say It

• "They offered us 72 months to get the payment down."
• "We went with a 15-year so we'd pay it off sooner."
• "How many months are left on the car?"

The Breakdown

Worked example. A $30,000 car loan at an example fixed rateFixed interest rateAn interest rate that's set when you borrow and stays the same for the life of the loan, so the monthly payment doesn't change. See more of 7%, the same rate for every term:

What the result means. Going from 36 to 72 months drops the payment by $414.84 a month and adds $3,478.59 in interest. In real offers the shorter term generally comes with a lower rate as well, as the CFPB notes for mortgages, so the true gap can be wider than this table shows.

Mortgages. The CFPB lists 15, 20 and 30 years as the usual mortgage terms. A 15-year loan carries a higher payment, but less of each payment goes to interest and more goes to building equityHome equityThe part of your home you own outright: its current value minus everything you still owe on loans secured by it. See more.

Good to Know

The CFPB's auto loan pages say a shorter term lowers the total cost of the loan and a longer one lowers the monthly payment while adding interest. They also note that some financial experts suggest keeping a car loan to five years or less, since longer loans are more likely to leave you owing more than the car is worth. The CFPB's guide to comparing auto loan offers asks you to look past the monthly payment, so line up the term, the APR and the total you'd repay for each offer before choosing.

Related Terms and Categories

• Amortization

  Paying off a loan through regular scheduled payments, each split between interest and principal, until the balance reaches zero at the end of the term.

• Interest rate

  The yearly percentage a lender charges for borrowing money, not counting fees; the APR adds certain fees to show a fuller cost.

• Car loan

  An installment loan used to buy a vehicle, repaid in monthly payments over a set term, with the vehicle as collateral.

• Mortgage

  A loan used to buy or refinance a home, secured by the home itself and repaid in monthly installments over a set term.

• Negative equity

  Owing more on a loan than the thing it paid for is worth, most often a car loan balance that's higher than the car's value.

• Fixed interest rate

  An interest rate that's set when you borrow and stays the same for the life of the loan, so the monthly payment doesn't change.

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