Total term – the most important facts
The term total term refers to the length of a loan agreement that is determined prior to the conclusion of the loan agreement
The shorter it is, the cheaper the loan.
A longer term increases the total cost of the loan.
The term therefore influences the interest rate and the total cost of a loan.
Total term – definition
The term refers to the agreed contract term for a construction loan or mortgage loan. So that’s the total term for a loan.
The borrower (debtor) must have repaid the entire loan amount including interest and all associated costs to the lender (creditor) by the end of this time.
The term for a home loan or loan is agreed between the lender and the borrower. It is binding on both sides.
What is the total term of real estate loans?
The total term of loans can vary and the choice of total term should be made dependent on various factors. Many banks offer a total term of a few years for a classic loan. These loan terms start at one year and can be extended to a total of ten years.
In contrast to a classic loan, the real estate loan (construction loan, mortgage loan) usually has longer terms. Since such a loan is usually about much higher loan amounts, it can have a total term of up to 30 years.
In principle, banks do not offer an infinite number of terms for all loan amounts. Especially when it comes to a loan of a small amount, the banks are often unwilling to grant a long term.
- The choice of a lender also depends on the combination of the desired loan amount and the requested total term. The larger the loan amount, the greater the range of terms.
Long or short total term for real estate loans?
The term of a loan is largely responsible for the amount of the interest rate proposed by the bank. The longer the term of a loan, the more interest the lender charges. The cause is increased risks for the bank, which may arise due to the following circumstances:
- Borrower becomes insolvent
- Unemployment loss
- Financial worries from prolonged or serious illness
- The bank’s capital is tied up in the long run
- No possibility of reinvesting the loan amount
The bank always compensates for these risks by raising the interest rate slightly. This means that a shorter term can have a positive impact on the borrower’s charges.
The interest rate does not depend solely on the term. It also affects the total cost of a loan. The reason for this is, of course, the period over which interest has to be paid. The borrower repays part of the loan amount and the interest on a monthly basis. However, the longer it takes for the repayment, the more interest accrues, even with the same interest rate.
What the borrower should consider when choosing the term is his own financial situation. On the basis of payments already to be made for rent, energy, fees (e.g. cell phone), food, clothing or existing loans, the highest possible credit rate should be determined and the term determined on the basis of this.