Understanding Loan Repayment Terms

From car loans and student loans, to home mortgages and credit cards: there are hundreds of reasons to borrow money and numerous types of loans to help you access the funds you need. Every loan is unique, and when it comes to paying back what you owe, different loans and credit cards can have very different loan repayment terms.

If you’re currently in possession of a loan or credit card balance, it’s important to understand the conditions involved in paying back what you owe. These can determine if your interest rate will change; how soon you need to start repaying the loan; and if you’ll be penalized for paying off the loan sooner than expected.

Here are some key loan repayment phrases to know:

• Annual Percentage Rate (APR): When paying back a loan, a lower interest rate means less money owed in the long run. To understand how much interest you’ll owe, check the Annual Percentage Rate (APR) listed in your loan repayment terms. APR expresses your yearly interest rate, but doesn’t include additional fees or compound interest – so your total yearly interest payments may be higher than the APR listed.
• Types of Interest Rates: Is your loan fixed, variable, or hybrid? A fixed interest rate means you’re locked into one interest rate for the life of the loan, whereas a variable interest rate fluctuates based on the market. A hybrid interest rate will remain fixed for a set period of time, after which point the rate becomes variable.
• Repayment term: Your repayment term refers to the period of time in which you’re expected to pay off the loan. Monthly payments and total interest owed will be based on the length of the repayment term: a longer repayment term often means less money owed per month but more interest paid in the long run.
• Grace period: The phrase “grace period” may have different meanings depending on what type of loan you’re repaying. Federal student loans often give graduating students a grace period of six months until they need to start paying off their loan. With other types of loans, a grace period usually refers to the short period of time after a due date, in which a borrower is allowed to delay payment without any negative impact to your credit score. It’s important to note, however, that many lenders do charge compounded interest during the grace period.
• Deferment: During deferment, the borrower does not need to make any payments on their loan. However, it’s possible that interest may accrue during this period. Deferment is most commonly seen in student loan and home loan repayment terms. Students often receive a deferment for the length of their schooling, and new homeowners may get a month or two of deferment before they need to make their first mortgage payment. Borrowers can also approach their lender and ask about deferment possibilities.
• Servicer: The servicer of a loan is the credit union, bank, or private company responsible for administrating the process of borrowing and repaying money. It’s important to work with an experienced, reliable servicer to ensure that you as the borrower get the best possible conditions on your loan and that you have trusted people to contact with any questions or concerns about the repayment process.      
• Principle-only payment: “Principle” refers to the original sum of money borrowed, as opposed to the interest you owe on top of that sum. Some borrowers choose to make principle-only payments in addition to their normal monthly payments, in order to repay loans more quickly and reduce their total interest owed. However, due to potential pre-payment penalties, making a principle-only payment isn’t always possible.
• Interest-only payment: While rare, it is possible to apply for an interest-only mortgage or student loan, which means you repay your interest before repaying the original principle borrowed. The benefit of an interest-only mortgage is that in the short-term, your monthly payments will be lower than with a normal loan. However later on, at the end of the interest-only period, you will need to make a balloon payment on your principle.
• Skip-a-payment: Lenders will sometimes let you skip a payment, with no penalties and without harming your credit report.
• Balloon payment: This refers to a lump sum repayment of your loan principle once the loan period has ended. Borrowers often choose to refinance the loan in order to cover this.
• Pre-payment penalties: Some loan repayment terms will stipulate pre-payment penalties, which prevent the borrower from making too many principle-only payments or repaying a large chunk of the loan all at once. 

Always feel free to contact your loan servicer or credit card company for further details on your repayment terms – it’s their job to help! If you’re looking for more information about federal student loan repayments, check out studentaid.gov/manage-loans/repayment/plans.

For personalized financial advice, consider contacting a GreenPath financial consultant!