Definition
The loan term is the length of time over which a loan must be repaid, from a few weeks for some short-term finance to many years for property-secured or equipment loans. A longer term lowers each repayment but usually increases total cost; a shorter term does the opposite. A sensible rule is to borrow for about as long as the thing you are funding takes to earn back its cost.
The term is one of the five moving parts of every loan, alongside amount, repayments, cost and security.
The trade-off
Shorter terms mean bigger repayments but less total cost. Stretch the term and each payment shrinks while the overall bill grows. Neither is better in general; the right term depends on the purpose and your cash flow.
Matching term to purpose
A short cash flow gap suits a short term or revolving facility. A van you plan to run for six years should not be on finance much longer than that. A fit-out should be financed within the lease. Our guide to choosing a loan term has examples.
Check the total
Compare the total cost of different terms with the true cost calculator. To talk through the right term for your purpose, make one enquiry.
Common questions
Can I change my loan term later?
Sometimes through a variation or refinance, possibly with fees. Choosing well at the start is easier.
What happens at the end of the term?
The loan should be fully repaid, unless there is a balloon or residual, which must be paid, refinanced or covered by selling the asset.
Sources and further reading