Loan terms simplified
Everything you need to know about loan terms
Understanding loan terms is crucial to taking out finance. While you may have big plans for the money you’re looking to secure, it’s just as important to plan for repaying the lender.
A failure to repay can have serious consequences, depending on what kind of financial product you take out. However, having clarity on different loan terms helps you understand the entire process. Read on for a breakdown of the other terms that could apply to a loan you take out.
What are Loan Terms?
Loan terms are the conditions and details of your loan agreement. They outline how much you borrow, the interest rate, the repayment schedule and any fees involved. These determine how you repay the loan and the total cost over time. Knowing your loan terms helps you understand your financial commitment and avoid unexpected costs.
Key components of loan terms include:
- Repayment schedule: How often you make repayments and the amount of each one.
- Interest rates: The percentage you pay on top of the borrowed amount.
- Fees: Any additional costs, such as origination fees or penalties for early repayment.
- Collateral: Whether you need to offer an asset, like a home or car, to secure the loan.
Loan term length: Understanding repayment schedules
Loan term length refers to the duration you have to repay the loan. It’s also known as the repayment period. The loan length helps you determine how much you’ll repay each month and the total interest over the loan’s life.
Loan terms can range from a few months to decades, depending on the type of loan and your financial situation. A longer loan term usually means smaller monthly repayments, but more interest paid overall. Conversely, a shorter term results in higher monthly repayments but less total interest.
Types of loan terms
There are two main types of loan terms: short-term and long-term. Each has its advantages and disadvantages, depending on your financial needs.
Short-term loans
Short-term loans generally last between one to three years. They are ideal if you need to borrow a smaller amount or want to repay quickly.
- Advantages: Lower total interest costs, faster debt clearance
- Disadvantages: Higher monthly repayments
For example, a short-term secured loan can help you manage unexpected expenses without long-term debt.
Long-term loans
Long-term loans extend over five years to multiple decades. They suit larger financial needs, such as buying a home or land to build on.
- Advantages: Lower monthly repayments, ability to borrow larger amounts
- Disadvantages: Higher total interest paid, longer debt commitment
Long-term secured loans are common for mortgages, allowing you to spread repayments over many years.
Secured loan terms
A secured loan is one backed by collateral. This means you offer an asset, like your home or car, to secure the loan. As the lender has less risk, you may benefit from lower interest rates, higher borrowing limits and longer loan terms.
If you buy a home with a mortgage, this is a form of secured loan.
However, it’s important to remember that you risk losing your collateral – which could be the home you live in – if you do not meet your repayments.
Understanding secured loan terms helps you decide if offering collateral is the right choice for your financial needs.
Get clear on collateral
Collateral is an asset you offer to get a secured loan. It provides the lender with assurance that they can recover their money if you fail to repay. Understanding what can be used as collateral and the implications are vital when considering a secured loan.
What can be put up as collateral?
- Property: Homes or other real estate may be used for large loans as well as mortgages.
- Vehicles: Cars, motorcycles or other vehicles can secure auto loans or personal loans.
- Savings accounts or investments: These can back certain types of loans, providing a safety net for the lender.
- Valuables: Items like jewellery or valuable collectables such as fine art may be accepted, though they are less common.
If you default on your loan, the lender can seize and sell the collateral to recover the outstanding debt. For example, if you fail to keep up with your mortgage repayments, the lender may take possession of your home. Similarly, a lender could repossess your vehicle if you miss repayments on an auto loan.
Factors influencing loan terms
Several factors influence the loan terms you might qualify for or choose. Understanding how they relate to each other and your finances is an important part of choosing the right loan.
Your financial situation
Your income, credit score and existing debts play a crucial role. A higher credit score and stable income can qualify you for longer terms and better interest rates.
Loan purpose
The reason you’re borrowing affects the term length. For example, buying a house or improving your existing home typically involves a long-term loan, while car finance might require a shorter term.
Lender’s policies
Different lenders have varying policies on loan terms. Some may specialise in short-term loans, while others offer a range of term lengths.
Interest rates
There’s a relationship between loan term length and interest rates. Generally, longer terms come with higher total interest, even if the monthly repayments are lower.
Choosing the right loan term for your needs
Selecting the right loan terms involves balancing your financial goals with your ability to repay. Here’s how you can choose the best terms for you.
Assess your finances
Determine what you need the loan for and how it fits into your overall financial plan. Are you aiming to fund home improvements, invest in a business or manage debt?
Balance repayments and interest
Shorter terms mean higher monthly repayments but lower total interest. Longer terms offer smaller repayments but increase the total cost. Calculate what you can afford each month without straining your budget.
Impact on credit score
Timely repayments on any loan can improve your credit score. However, failing to meet higher monthly repayments on a short-term loan can negatively affect your credit.
“Selecting the right loan term is about balancing your financial comfort today with the total cost over time. Shorter terms may seem daunting with their higher monthly repayments, but they save you money on interest. Meanwhile, longer terms offer breathing room in your budget but come with a higher overall cost. The key is to evaluate your priorities, cash flow and long-term goals before making a decision” – Richard Prescott, Loan Manager at Evolution Money
Secured vs. unsecured loan terms
Secured loan terms often offer lower interest rates and higher borrowing limits because they are backed by collateral. However, the risk of losing your asset if you default is a significant consideration.
Unsecured loans don’t require collateral, reducing the risk to your assets. They might have higher interest rates and stricter approval criteria.
Interest rates explained
Understanding interest rates is crucial when evaluating loan terms. Interest rates can be either fixed or variable, each affecting your repayments differently.
Fixed interest rates
Your rate stays the same throughout the loan term. This stability allows you to budget effectively since your monthly repayments remain consistent. However, if rates drop overall, you won’t benefit from lower repayments.
Variable interest rates
A variable interest rate can change based on market conditions. Initially, these rates might be lower than fixed rates, making your monthly repayments more affordable. However, they can increase over time, leading to higher repayments.
How interest rates are decided
Interest rates depend on several factors, including your credit score, income and the loan term length. Lenders assess the risk of lending to you. A higher credit score typically results in lower interest rates. Additionally, economic conditions and central bank rates influence how lenders set their rates. Understanding these factors helps you choose the rate type that aligns with your financial plans.
What fees can be added to loan terms?
As well as interest, having clarity on any fees helps you understand the true cost of borrowing.
- Arrangement fees: Charged for processing your loan application. They cover administrative costs and are usually a percentage of the loan amount.
- Early repayment fees: Applied if you pay off your loan before the agreed term. They compensate the lender for lost interest.
- Late payment fees: Charged if you miss a repayment deadline. They cover the lender’s additional administrative costs.
- Valuation fees: Often required for homeowner loans, these cover the cost of valuing the collateral, such as a property or vehicle.
- Legal fees: In some cases, especially with large loans, legal fees may be charged to cover the cost of preparing the loan agreement.
Understanding fees allows you to effectively compare different loans. Ask lenders for a complete breakdown of all potential fees before committing to a loan. This ensures you won’t face unexpected costs and can plan your repayments accordingly.
What loan terms are available from Evolution Money?
Evolution Money has helped all kinds of people get secured finance for all kinds of reasons – home improvements, business investment, debt consolidation and more.
We offer loan term lengths of 3 to 20 years to fit your financial circumstances. You could borrow £5,000 to £100,000 to help you with whatever’s in your future.
Want to find out more? Check your eligibility today and our team will be in touch to discuss the various loan terms that may be available to you.
Our help and advice hub is available at any time if you’re interested in learning more about the world of personal finances.
Representative 22.93% APRC variable.
For a typical loan of £26,600 over 180 months with a variable interest rate of 19.56% per annum, your monthly repayments would be £484.00. This includes a Product Fee of £2,660.00 (10% of the loan amount) and a Lending Fee* of £763.00, bringing the total repayable amount to £87,030.00. Annual Interest Rates range between 11.7% to 46.5% (variable). Maximum 50.00% APRC. *Lending Fee varies by country: England & Wales £763, Scotland £1,051, Northern Ireland: £1,736.
Think carefully before securing debts against your home may be repossessed if you do not keep up repayments on your mortgage or any other loan secured against it. If you are thinking of consolidating existing borrowing, you should be aware that you may be extending the terms of the debt and increasing the total amount you repay.
