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Answer: What Are Loan Terms?

Loan Terms Explained

One of the hardest things to comprehend with a loan is all of the terms that come with it. It seems that there are hundreds of pages you have to sign and initial, just to say you understand and will pay back the loan. And you sign them anyway, even if you don’t understand all that it is you are saying! What is a mortgage term? What does an adjustable mortgage mean? How can I tell if my personal loan will count against my credit score? There are a lot of things you need to know about before you commit to borrowing any money and have to start the repayment process. Not knowing the information could cost you more in the long term!

Length of the Loan

One loan term you should know is terms! That makes learning all about loans even more confusing. The term, or the life of the loan, is how many months it will take you to pay back the money. The longer your loan is, the smaller the payment will be. However, the longer you take to pay it back, the more interest you will be paying. Interest costs you money in the long run, so you would want to pay it back as soon as possible in order to save yourself a chunk of money.

Rates

Rates are the interest rate at which the money is being loaned out. A really low rate would be 2% or less on any money you finance. So when you are taking out a large sum of money, such as a mortgage, you will want to get the lowest rate possible. The higher the rate is, the higher your monthly payments will be and the longer it will take to pay back. The longer you have the loan, the more it will cost you in interest money.

The rates are also dependent on the length of some loans. For instance, if you have an adjustable rate mortgage, then you might pay just 3% each month for the first year. However, the interest rate might jump to 6% the next year. You will have a really low payment in the first few months, but then it jumps high after. Can you afford the change in payment? Getting a locked in rate might be a better option for you, even if it is slightly higher in the beginning. A Locked in rate won’t change and you won’t be worried about what the economy does and how it will affect your payment in the future. You will always be locked in at one rate.

Most mortgages are at 30 years for repayment terms. However, some people opt for 15 and even 40 year mortgages. The same goes for cars. There are 60 month loans and then there are 36 month loans. Pick whichever term works best for you as well as what interest rate makes it affordable to your budget before you make any large purchase.

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