The loan terms are the contractual obligations of a borrower and lender, as detailed in the loan agreement.
Loan terms include but are not limited to the interest rate, conditions under which the interest rate can change and how such changes are determines, loan fees, payment amount and due date, the length of time for repayment, prepayment penalties, use of loan proceeds and lender recourse in the event of default.
Federal law requires that the terms of a loan be disclosed to borrowers before they can be obligated by them.
Loan Terms Explained
Loan terms are the various requirements of a loan that determine the borrower's and lender's financial obligations. Common terms used in conjunction with loan terms are Annual Percentage Rate (APR), principal and length of loan. A good combination of loan terms is simple interest, a low APR and no prepayment penalties.
When you are deciding what kind of loan to get, there are a few things to keep in mind. Usually the most manageable loans are those with a low APR, low closing costs and those that let you build equity.
Simple interest is a pretty attractive loan term as well, especially if the interest is relatively low. Simple interest is charged only once, whereas compound interest is more expensive because it can be charged repeatedly-monthly, weekly, even daily-depending on the loan terms.
The APR, or annual percentage rate, on loans includes both the interest rate and the fees and charges, such as loan-processing fees and charges for credit-related insurance. For example, a loan may have an APR of 6 percent but an interest rate of 5.5 percent. The missing 0.5 percent APR represents fees and charges that you’ll probably pay up front at the closing of the loan. Your monthly payments will be based on the 5.5 percent rate which is usually compounded monthly. Check the loan terms of some loan programs you are interested in to see who has the most agreeable APR.
If the loan terms include a prepayment penalty and you are considering accelerating payments to pay off your loan faster, you should probably read the fine print. Prepayment penalties are charges for repaying your loan within the first few years. When a loan is repaid early, lenders lose a portion of their projected profits, so to compensate for that potential loss, they might include a prepayment penalty in the loan terms.