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What is a Loan Term?

What Is a Loan Term? - Know What It Means

Updated on December 23, 2022


Several phrases often sound similar but have different meanings. The phrase loan term often creates confusion because it's often used to refer to two aspects of a loan. When used in the singular form, the phrase means loan term length, and when used in the plural form, it implies loan terms and conditions. Let's discuss the two meanings of Loan Term separately.

Loan Term (In the Context of Term Length)

You are expected to repay the loan amount within a fixed period in monthly installments when you borrow. This fixed time duration is called loan term length. For example, Auto loans often have five or six-year terms, although many other options are available. Car loans are often quoted in months, such as 60-month loans. A 30-year fixed-rate mortgage has a term of 30 years. Loans can last for any time agreed upon by the lender and the borrower.
While looking for loan options, you'll usually have the opportunity to choose the loan term lengths depending on your credit score and the loan options available through the lender.

Loan Terms (In the Context of Terms & Conditions)

Loan Terms is generally used as a shorthand way to talk about the terms and conditions of a loan. The terms and conditions are the rules that define the way your loan works. When you borrow, you have to sign a loan agreement.
The loan agreement clearly outlines the terms and conditions of a loan. A loan agreement highlights the loan terms, such as annual percentage rate (APR), fees, due date, etc.

Why are Loan Terms Important When Applying for a Loan?

While applying for a loan, you should carefully read the loan terms and conditions and the loan term length. The terms and conditions are essential because of the following reasons:

  • Terms and conditions of a loan include details such as the interest rate, monthly payment for your loan, method of repayment, and legal steps that can and will be taken in case of loan default. This information informs the borrower of the lender's expectations for repayment.
  • A loan agreement outlines the terms and conditions used as legal evidence by both the lender and the borrower to solve loan-related disputes.
  • A written loan agreement highlights the terms and conditions making it impossible for the lender to modify any of the already agreed-upon terms and conditions later.

Does Loan Term Affect Interest Rate?

No, The loan term sets the interest rates; it doesn't affect them. Long-term personal loans typically have lower interest rates and lower payments. Similarly, short-term loans have higher monthly payments. But much of this depends on the specifics of which loan terms and interest rates you've chosen.

Types of loan terms

Types of Loan Terms (Length) You Can Get

The loan term length varies depending on the type of loan. A list of the most commonly borrowed loans and their average loan term lengths for repayment has been given below:

Personal Loans

The personal loan term length typically ranges from 3-84 months.

Auto Loans

Your car loan could be between 36-80 months.


Most fixed-rate mortgage loans have a term of 30 years or 15 years. However, some lenders even offer 20 years to repay.

Student Loans

The tenure of repayment for student loans can range from 5-20 years.

Types of Loan Terms & Conditions That Need to be Checked

The following are the loan terms and conditions that you should check before agreeing to any loan:

Interest Rate

In simple terms, interest is the amount you pay to borrow money, whether it's a mortgage, student loan, or credit card. When you have a loan or line of credit, you must pay back the original amount you borrowed and a percentage of that loan as interest. There are exceptions: if you have a promotional 0 percent interest rate or pay your credit card balance in full every month, you will not pay interest.

Loan Principal

The loan principal is the initial loan amount you borrowed from the lender. For instance, you get a loan for $50,000. Then the loan principal is $50,000. The principal amount partly determines the interest you must pay to clear the loan debt. As you repay the initial loan amount, the interest amount accrued each month gets reduced.

Loan Duration

Loan duration is the time you have to repay your loan debt. It starts from the date of the issuance of the loan amount and ends on the date on which the entire loan amount is to be fully repaid.


Fees include application, origination, closing, annual, and prepayment penalties or late fees.

Annual Percentage Rate (APR)

The APR is the total interest accrued annually on the initial loan amount. You can use the APR as a bottom-line number to compare different loan offers. It also highlights the total cost of paying back the loan annualized over one year. This will also help you to manage your finances properly as you can develop a budget around it.

Due Date

This is the fixed date you must make your monthly loan payment. This date is set across all months. If you fail to pay on the due date, you might have to pay late fees to the lender. The late fee is also mentioned in the loan agreement. If you repeatedly miss the due date of payment, it will affect your credit score too.

Can you negotiate your loan terms?

Can You Negotiate Your Loan Terms?

Yes, you can negotiate your loan terms by following the following steps:

  • First, you need a sound knowledge of your loan terms and conditions to negotiate and get a better deal.
  • Many lenders would ask you to go through the pre-qualification process. The pre-qualification process is whereby the lender reviews your financial status and then estimates the amount of money they can lend you. This process enables you to see what your terms and conditions would be before submitting your loan application.
  • The more lenders you prequalify with, the easier it will be for you to compare the terms and conditions different lenders offer and choose the best option.
  • Once you pick out the best loan offer, you can use it to attract an even better offer. You can take the loan offer to other lenders you have prequalified with and see whether they can offer you better terms. You can negotiate loan terms: the monthly payable amount, the APR, and the fees.
  • You can use this negotiation strategy to attract the best loan offer on any loan. However, this negotiation policy works best in the case of car loans and mortgages. Since a mortgage loan is expensive, even a minor adjustment in the loan offer will be highly beneficial and help you save a decent amount in the long run.


Now that you have understood the difference between the two ways the phrase Loan Term can be used, read the loan terms and conditions and the loan term length before finalizing any loan agreement.
Also, obtaining any loan is a fairly complex process in itself. However, having a good credit history will allow you to choose several loan options. This is because the better your credit score is, the more lenders will be ready to lend you money.

Photograph of author Joseph Priebe

Joseph Priebe

Joseph Priebe takes pride in assisting audiences with his articles to help them make sound financial decisions.

With over ten years of experience writing financial content his goal at CASH 1 has always been creating engaging and easy-to-digest information for anyone searching for immediate or long-term monetary solutions.

When Joseph is not writing about personal finance, you can find him photographing the Southwest United States with his 4x5 Graflex Crown Graphic camera. He is based in Phoenix, Arizona.