Loans

Loan Tenor and How It Works

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.

What Is Loan Tenor?

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.

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 be 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 by. Basically, a loan with five years to repay the loan has a five-year tenor. A two-year loan has a two-year tenor. If you take out a 10-year loan and have been paying it off for seven years, then you have a tenor of three years.

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

Personal loans are 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. 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 a cash advance for customers you need some quick short-term funding. However, these cash advances 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. 

References:
Difference Between Loan Tenor And Maturity: Funding Terms You Need To Know