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When taking out a secured loan to make a purchase, shorter loan terms usually have lower interest rates. For example, when taking out a home mortgage, if you choose the 15-year loan term, the interest rate is usually at least one percent less than the interest rate for the 30-year loan term. If you can afford to make the higher payments with the shorter loan term, you will save money in interest over the length of the loan.
The loan term usually refers to the length of the loan. New car loans are usually available for between 36 and 72 months. Payments are divided evenly over the number of months so that the loan is paid in full by the last month. Unsecured loans usually have terms between 12 and 48 months. Home mortgages are usually 10 to 30 years. A 5-year balloon mortgage has monthly payments based on 30 years, but the balance of the loan is due in full after 5 years.
Loan terms vary depending on the type of
loan as well as the collateral, if any, used to secure the loan. The terms offered by banks for unsecured signature loans are usually shorter than terms offered for loans secured by cars. Loans secured by a home are usually much longer than other types of loans. Banks offer longer terms on secured loans because if the borrower stops making payments the bank can repossess the collateral used to secure the loan.
When an individual takes out a loan from a bank and makes payments each month over the term of the loan as agreed, a credit history is established. After fulfilling the loan terms of several loans successfully, a person can build an excellent credit history. Those with an excellent credit history are offered the lowest or best interest rates.
Term loans allow individuals to buy items they need or want now, even though they do not have enough money in savings. The bank loans the money for the purchase and then the individual makes monthly payments over time until the bank is paid back in full with interest.