The term “tenor” refers to the amount of time remaining before a financial contract expires when used in the context of the lending industry. Put simply, the tenor of a loan is how long it is scheduled to take for the borrower to repay the loan.
The length of time of a tenor can be given in years, months, or days. While typically, tenor refers to financial products like bank loans; it is also used when discussing insurance products.
When it comes to financial literacy and personal finance topics, it can be challenging to keep track of the enormous amount of financial terms that exist. It can get further complicated when some of them are often used interchangeably, even when they seemingly have different meanings.
If lenders or financial advisors use a term that you are unfamiliar with, it’s a good idea to double-check the financial term’s meaning so you are always on the same page and avoid being caught off-guard.
How Loan Tenor Works
The tenor of the loan a borrower receives will affect different aspects of the loan itself. High-tenor loans have a longer length of time before the financial contract expires, making them a higher risk for lenders. Therefore, a long-tenor loan is likely going to have a higher interest rate to compensate for the risk. Shorter tenors are going to have lower interest rates.
Tenor plays a particularly important role in an insurance policy called a credit default swap. Credit default swaps offer bond issuers protection against default by allowing one lender to exchange the risk with another lender. With a credit default swap, the asset’s maturity and financial contract must match with the tenor.
Different Types of Tenor
Tenor is often used to refer to the contract length of the following financial instruments:
Insurance
When purchasing insurance, the tenor refers to the length of time until the insurance contracts expire. The tenor will have time left if you are well into the contract. For example, if you buy a life insurance policy with a 25-year term and have been making payments for the past five years, then you have a 20-year tenor.
Bank Loans
Bank loans have tenors according to the length of time their terms state the loan must be repaid. Basically, bank loans with five years to repay them have a five-year tenor. Two-year bank loans have a two-year tenor. If you take out 10-year bank loans and have been paying them off for seven years, then you have a tenor of three years.
Short-term, and Long-term Tenor Explained
Short-term tenor is usually anything that is less than a year, sometimes less than 18 months. Medium tenor is usually considered anything that is more than that time may be considered a long-term tenor. However, for ranges that fall between a few years, they may be labeled as medium tenor.
Factors to Consider in Choosing the Right Loan Tenor
Before choosing a tenor, it is extremely important to pay attention to a few different factors which will impact your overall cost and repayment. Here are some key factors to consider:
- The monthly payment for your loan — Your monthly payment will be an essential part of your loan. Before you choose a loan tenor ensure that you will be able to comfortably afford your loan payment. A longer loan will mean that you will need to adjust your budget comfortably for an extended period of time. With a shorter loan, you may be able to get through with a tighter temporary budget.
- The monthly and overall interest cost — Your monthly and overall interest is another essential factor to pay attention to. The longer the loan, the more interest you will likely pay overall. However, longer loans may be more manageable.
- The interest type (fixed or variable) — Fixed interest stays the same throughout the loan, while variable interest does not. With a variable interest rate, the longer the loan the more potential changes with interest, good or bad. While fixed interest will stay the same no matter how long your loan is.
- The lender — Regardless of loan tenor, the lender is important. When it comes to this factor with loan tenor, find a lender that accommodates your repayment length needs.
- Early repayment options — Early payments can really help you save on interest rates, especially for a long-tenor loan, so find a lender that provides flexibility with this.
- Collateral — Consider whether the loan requires collateral. Collateral-backed loans may have different implications for tenor selection, and it’s important to understand the terms and conditions related to collateral for each lender.
Tips for Managing Your Loan Tenor Effectively
No matter how short or how long your loan is, there are strategies that can help you manage your loan; here are some tips:
- Set up automatic payments.
- Make additional payments, if possible, to pay off your loan early.
- Be transparent with your lender if your financial situation changes throughout the loan process.
- Create a budget to help prioritize your loan payments.
- Carefully evaluate your financial situation before signing up for a loan.
- Have a solid emergency fund before taking out your loan.
- Regularly review your loan and consider other options if they can help you save money.
Pros and Cons of Different Loan Tenors
Short and long-term loan tenors are the most referenced, so we’ll stick to those when talking about the pros and cons. Here are some of the advantages and disadvantages of short-term loan tenor and long-term loan tenor (let’s say you take out the same amount with the same interest rate for easier comparison):
Certainly! Here’s the information presented in a table format:
| Pros of Long Loan Tenor | Cons of Long Loan Tenor |
| – Lower monthly payment | – Higher total interest rate cost |
| – Usually, higher borrowing limits | – Long-term commitment to debt payments |
| – Can help build a strong credit portfolio | – Asset depreciation (if one is involved) |
| – Can help gain access to capital | – Can be an issue if financial situation changes |
| – Usually require good credit |
| Pros of Short Loan Tenor | Cons of Short Loan Tenor |
| – Lower interest overall | – Higher monthly payment |
| – Faster access to funds | – Smaller loan amounts |
| – Sometimes more flexibility in use | – Less time to repay the funds |
| – A shorter commitment to debt | – Sometimes considered “bad debt” |
Refinancing and Changing Your Loan Tenor
Let’s say you take out a loan, but your finances change, or you realize that a loan isn’t a great fit. The good news is that, in most cases, you can refinance to change your loan tenor. The way this works is simple: you find a new loan with a term that fits your needs and transfer over the debt, or simply take the funds and pay off the existing loan yourself. Now, instead of your old repayment terms, you will have a new loan tenor. You can work with a new lender or refinance with a new one. Your credit score, income, and other financial information will be looked at for eligibility.
What Is The Difference Between Tenor and Maturity?
If you are confused between the terms tenor and maturity, don’t worry; you are not alone. Tenor and maturity are two terms that are often used interchangeably despite having distinct meanings. The term maturity refers to the initial length of the agreement at the time the contract for the financial product was signed.
Unlike tenor, maturity remains constant on financial instruments. Tenor goes down in years as time passes in the contract length. A ten-year loan has a maturity that remains constant at ten years, while the tenor would be five years if you’ve already been paying for five years.
Finding Funding
Whether you are looking for short-term or long-term funding, there are a variety of loan options out there for a wide variety of financial situations. You don’t need to be looking to purchase a home or vehicle or start a business to find a loan.
Here are a few options that you can turn to when you are looking for some short-term financing for a specific purpose or simply to hold you over through a hard time:
Personal Loans
A personal loan is one of the most versatile loan types. You can apply for them through banks and credit unions like other loans, but you can also find them from online lenders. A significant benefit of personal loans is that they can be used for any purpose you choose. Personal loans are not limited in their use, like auto loans and mortgages.
Depending on their needs, borrowers can obtain personal loans with short and long tenors. Whether you are looking to pay off your loan within a period of a couple of weeks or a couple of years, you will likely be able to find a loan that fits your needs. Interest rates for personal loans fluctuate depending on the lender, your creditworthiness, and the term maturity length.
Bad Credit Options
If you have poor credit, you might be under the impression that you are out of luck when it comes to lending opportunities. But even though your options might be more limited, there is still an abundance of loans for people with bad credit. Bad credit loans are going to have significantly higher interest rates, especially if there isn’t some kind of collateral involved.
A higher interest rate makes up for the risk taken by the lender in approving you and increases the overall cost of the loan for you. However, in many circumstances, the high interest rate is acceptable to get the funding you need to get back on your feet. Common types of loans you can get despite bad credit include payday loans, title loans, credit-builder loans, and short-term loans.
Credit Cards & Cash Advances
Credit cards can make a creative source of affordable funding if you use them strategically. According to the United States Chamber of Commerce, approximately 176 million Americans have credit cards!1 While it’s true that credit cards have high interest rates and shouldn’t be relied upon for long periods of time, there is a way they can be leveraged for excellent short-term funding.
Some credit card companies extend generous promotional offers to new customers. You could receive a 0% APR interest rate for the first year to 18 months on a brand-new credit card account. Take advantage of this by borrowing off the credit line and paying off the balance before the promotional period expires so that you don’t pay a dime in interest.
Additionally, there are credit card companies that offer an online advance for customers if they need some quick short-term funding. However, these cash advance loans have incredibly high interest rates, and you typically need to repay them in one lump sum to avoid steep fees, so we advise that you only use them as a last resort.
FAQS
The length of a financial contract directly influences the tenor of the loan. The tenor refers to the remaining duration until the financial contract expires, which decreases as time progresses.
In high tenor loans, credit default swaps play a crucial role. They allow lenders to exchange the risk of default with another party. The asset’s maturity and the tenor of the financial contract must align for these swaps to be effective.
Unlike the tenor, the maturity of financial instruments like government and corporate bonds remains constant. The maturity is set at the outset and does not change, whereas the tenor decreases over time.
In personal finance topics, understanding the tenor is crucial, especially for personal loans. The tenor refers to the length of time until the loan is fully repaid, affecting monthly payments and interest rates.
Individuals with weaker credit ratings should carefully consider the tenor when entering insurance contracts. A longer tenor might mean higher premiums, but it can provide more extended coverage, which is vital for financial stability.
Yes, there is often a maximum tenor for different types of loans. For instance, personal loans might have shorter maximum tenors compared to long-term financial products like government bonds or mortgages.
A steady cash flow allows borrowers to opt for shorter tenors in financial contracts, as they can afford higher monthly payments. This can lead to savings on total interest paid over the life of the loan.
A five-year tenor in personal finance management implies a medium-term commitment. It balances between not too long to accrue excessive interest and not too short to cause financial strain due to high monthly payments.
Credit default swaps can affect the attractiveness of corporate bonds with different tenors. They provide a mechanism to hedge against default risk, making longer tenors more palatable to investors.
In financial planning, the tenor of a loan should ideally align with the asset’s maturity. For example, the tenor for a car loan should match the expected usage period of the car to ensure financial efficiency.
A Word From CreditNinja
While you have many options available when it comes to finding funding, it’s always important to compare offers and do your research. Check out multiple lenders before committing to just one. Look at online reviews, and you can even call a few places and speak to a loan agent. CreditNinja also suggests you try some non-loan alternatives, such as:
- Using money from savings or an emergency fund.
- Asking a trusted family member or friend.
- Adjusting habits to free up your budget.
Want to learn more about loans online, credit scores, and making the most of your budget? Check out the CreditNinja blog dojo for tons of free financial articles, loan calculators, and more!
References:
1. Personal Loan Statistics | Chamber of Commerce
2. Difference Between Loan Tenor And Maturity: Funding Terms You Need To Know
