Loan term

The term is the third of the three numbers an installment loan is built on. The balance and the rate set what a month's interest costs; the term sets how many payments the balance is spread across. The standard formula turns the three into one level payment, and the amortization schedule follows from that payment.

A longer term lowers the payment, because the balance is divided over more months, and raises the total interest, because the balance stays out longer at the same rate. In the first month the interest is identical under either term; the two schedules part after that, as the shorter term's larger payment retires more principal and leaves less for the next month's interest to accrue on.

The term is set when the loan is made and does not change as the loan is paid; what changes is the time left on it. A loan paid ahead of schedule reaches zero before its term ends, and a refinance replaces the term with a new one.

A $20,000 loan at 7% APR is offered over 36 months or over 60. The monthly rate is 7% divided by 12, so the first month's interest is $116.67 under either term. Over 36 months the level payment is $617.54; over 60 it is $396.02, which is $221.52 a month less. The rate is fixed and the payments are made as scheduled; the figures here are this example's arithmetic.

The 36 payments come to $22,231.44, of which $2,231.44 is interest. The 60 payments come to $23,761.20, of which $3,761.20 is interest, so the longer term costs $1,529.76 more for the same $20,000.

Balance

$20,000

Monthly rate (7% ÷ 12)

0.583%

Payment, 36 months

$617.54

Payment, 60 months

$396.02

Interest over 36 months

$2,231.44

Interest over 60 months

$3,761.20

Extra interest on the longer term

$1,529.76

The term is what trades the monthly payment against the loan's total cost. In the example the 60-month term takes $221.52 less out of a month and adds $1,529.76 to what the loan costs over its life.

The term also sets the payoff date, and with it how long the balance sits among a household's liabilities. Two loans with the same balance and rate can carry different payoff dates for no reason other than their terms.

In Taiga Finance, the “Track a debt” drawer on the Debt page has a “Terms” section. For a non-revolving type, such as “Student Loan”, “Auto Loan” or “Personal Loan”, it takes an “Original balance ($)”, a “Term (months)” and an “Origination” month beside the “Current balance ($)”, “APR (%)” and “Minimum payment ($)” every debt has; a “Credit Card”, “HELOC” or “Buy-Now-Pay-Later” debt has no term field. Once the debt is tracked, its drawer's “Details” section edits the “APR” and the “Minimum”, and the payoff plan projects the debt from its balance, its rate and its minimum payment rather than from the term.

A mortgage carries its term on the loan record: the original principal, the rate, the term in months and the origination date, from which the scheduled monthly principal and interest follows. The property's loan card reads the term as years with the years left, such as “30yr · 17yr left”. On the public mortgage payoff calculator, “Term left” is typed in beside “Balance” and “Rate”. On a tracked loan the planner's “Term” is a locked fact read from the loan, with a door to the loan record.