Choosing the Right Loan Term for Your Mortgage

Loan terms are confusing because they’re used in a variety of ways and may refer to multiple aspects of mortgage loans. For example, “loan term” could refer to the lifespan of a loan or the amount of time it takes to pay off debt from a specific loan.


Choosing the right loan term length can have significant impact on your monthly payments and overall costs. Learn how to understand and negotiate loan terms before applying for one.

What Is a Loan Term?

A loan term is the length of time a lender agrees to lend you money for a specific purpose. Mortgage loans typically have terms that range from ten to 30 years, while auto and personal loans may have shorter terms. Choosing the right loan term is one of the most important decisions you will make when taking out a new loan, as it can have a significant impact on your monthly payments and overall cost.

The length of a loan term directly affects how much you pay in total interest charges, as well as your monthly payment amounts. For example, a two-year term will result in significantly higher total interest charges than a one-year term, even if the amount you finance remains the same. This is because the extra year adds additional interest charges to your initial loan amount.

Your loan terms will also detail any associated fees and penalties, including how long you have to make your payment before being charged a late fee. These details can vary from lender to lender, so be sure to review the terms carefully before you sign your loan agreement.

A thorough understanding of your loan terms is essential to help you choose the best mortgage for your situation. Many lenders allow you to prequalify for a mortgage, so you can see what the loan terms will be before you commit to a particular lender.

Short Term Loans

Short term loans are designed to cover expenses over a short period of time. They usually have higher interest rates and charges than standard loan options but can be a lifesaver when you need cash quickly or are unable to raise funds from other sources such as credit cards or loans from family or friends.

The requirements for this type of borrowing tend to be less stringent than other types and it’s possible to qualify even if you have a low credit score or no credit history. They also have shorter repayment periods than other types of loans, typically 18 months or less.

Many lenders offer a quick application process, allowing you to submit documents such as form of identification, pay stubs, bank statements and tax forms online. You can then receive a loan estimate from the lender which will outline all of the costs involved including repayment terms and interest rate, fees and charges.

It’s important to consider carefully the pros and cons of a short term loan before you take one out, especially if you have other borrowing options available to you. A short-term loan can lead to a cycle of debt, so be sure you can afford the monthly payments before signing a contract. Also, check if your current bank account has a line of credit you can use to access emergency funds without taking out a new loan.

Intermediate Term Loans

As the name suggests, intermediate-term loans are repaid over periods of one to three years. These are best for business expenses that will generate revenue within a short period, like a new piece of equipment or building that will be used to manufacture a product. The process of applying for an intermediate-term loan is similar to applying for a short-term loan, with lenders asking for financial reports and statements to evaluate the borrower’s creditworthiness.

For example, a contractor might take out an intermediate term loan to purchase a piece of heavy equipment, which will increase the company’s efficiency and speed up its production processes. As a result, the company will be able to bring in more clients and produce more revenue over time. This new revenue will help the company pay off the business loan.

In many cases, borrowers are required to provide collateral and personal guarantees with a business loan. These requirements are designed to reduce the risk for a lender and ensure that if a company defaults, the bank can recoup its losses. This is an important safeguard for lenders, especially in the case of long-term business loans that are typically paid off over 30 to 25 years.

Long Term Loans

Long-term loans are typically repaid in terms of more than 60 months and can be used for a number of purposes, including mortgages, student loan repayment, personal debt consolidation and home improvement. You may also choose a longer-term loan for a large purchase such as a car or furniture, especially if the item you need is less expensive than other financing options such as a credit card.

Generally, long-term loan repayment periods are dictated by the useful life of the asset being financed. For example, financing a piece of medical equipment for a doctor’s office would not be appropriate for an eight-year term, but more appropriately, a three-year term.

As with short-term and intermediate loan terms, you must meet a variety of requirements to qualify for a long-term loan, such as being a profitable business and having reliable financial records. In some cases, a long-term loan may require collateral, such as the borrower’s house, in order to ensure that the loan is paid back.

The length of a loan’s term impacts both its monthly payments and the total amount that you pay in interest. While you can reduce your monthly payment by selecting a long-term loan, you must consider how much additional money you will end up paying in interest to determine whether this is the right option for you.