How long are loans good for?

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Transcript

In this lesson, let's talk about two things associated with the length of time of the loan. They are loan terms and loan amortization. Now, particularly when I use the word loan terms, that doesn't mean a phrase or a definition, per se, it actually has to do with the length of time of a component of the loan. So we're going to go through them so that you understand the two differences, a loan term and a loan amortization. Now, a loan term and amortization are periods of time of the length of the loan. And remember, loans are meant to be paid back over time.

That's the difference between getting in investor and getting a business loan business loans have lengths of time that you have to pay back the full amount plus interest of that loan. Investors sometimes, you know, it can go on 710 or even longer years before they recoup anything. Whereas with alone, you're making regular monthly payments. The good news is, is at some point the loan goes away. You pay that off In five years, it's gone. Unless you need new funds, you don't have to deal with the lender ever again.

And of course, as I said, investor equity does not necessarily go away. It could stick around until you have what's called an exit. You sell out to someone you do an IPO, you do those types of things. So how long does a loan last? Well, there are two key definitions again, the one two things you want to understand is the difference between these two. A term a long term is the length of time that the lender guarantees You're right.

So your car loan, if it is a five year car loan, and it is a fixed rate car loan, that means you're guaranteed that right? For five years, whether market rates go up, whether they go down doesn't matter, you're guaranteed that the loan amortization is different that is the length of time that your payment is calculated against. Now, again, in a car loan, they're typically the same your loan term is five years and the payback time is five years. The amortization is five years. So your payment is broken up over 60 months, five years times. 12 months.

Equals 60 months. That's the two. So here's an example. Carlin has a five year term and a five year amortization. The same could be true for a business loan for your car. Here's where it gets tricky.

With a commercial building loan, you may have a totally separate term and amortization. Typically, what you'll see a lender do is they'll have a five year term and a 15 year amortization. So what's the difference? The loan rate that they quote, you is locked in for five years, but they're going to break up the payment over 15 years. So the hundred thousand dollars you own that property? Let's assume it's around $100,000 and that includes interest will be divided by 180 months.

But after five years into that loan, you're going to have to go back through underwriting and a lender may issue you if they decide to keep your loan for the remaining five or 10 years, then the lender may increase the rate possibly Decrease depends on the situation out in the market. But I 515 means a five year term term is always first mentioned and a 15 year amortization. What about a line of credit with a line of credit, it is typically a one year loan. So it's a 12 month term. But the amortization can vary. So why do I say that?

So the line of credit, since it's variable use every year, you're probably going to have to reapply and asked to keep your line of credit. And the amortization may vary. And the reason that amortization varies is because on line of credit, you can draw against it, pay it down, and then draw again, and you still may not owe the same amount that you originally drew on, or maybe you borrow more than the first draw you made. So a line of credit fluctuates, and that's why your amortization may vary, but the term of the line of credit will always be 12 months. So what happens at the end of the term, I've mentioned it a couple of times, but I really want to bring it Home. Here's a couple of things that can happen at the end of the term, not the end of the amortization, not the end of how the payments are broken up at the end of the loan term, the loan could be refinanced.

So the lender may call you you're getting close to the first five years of the loan term on your commercial building. The lender may call you 90 days ahead of time and say, Hey, do you want to refinance this with a set current market rates? If so, now send us brand new documentation, and we'll take a look and re approve you for the loan or maybe asked you to take the loan and pay it off and take it somewhere else. You could be forced to pay down part of the loan, let's say you've got a line of credit, and you've drawn it up to the full amount and you've never really reduced it very much. The lender could say we'll keep it on the books and allow you to stay a customer of ours, but you need to make a $20,000 payment for that line of credit to drop it back down.

You could be forced to pay off the loan entirely. And one of the things about that to understand is even if the lender is doing what's called calling the loan asking you to pay it off in full. Usually that's because you've performed badly. Maybe you've not made your payments on time or they looked at your financial situation, and then noticing you're in a lot of trouble. They're trying to get you to pay that loan off and move it on, doesn't mean you always have to come up with cash to do that. If you can get that loan refinance at another lender, they'll just pay off your current lender, and off you go.

So the big thing to remember loan term is how long you're guaranteed to have that loan with that lender at the rate that they quoted you unless it's a variable rate, just assuming it's fixed, right. And then the loan amortization is how much the payments can be broken up over for the most part, often on smaller loans, they will match but as you get into bigger loans and real estate loans, your amortization will be a lot longer.

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