How does the loan term affect the payment amount?

The length of your loan term affects how much you must pay each month. The longer the loan term, the lower your monthly payment amount is .

How does the term affect a loan?

The term of your loan is how long you have to repay the loan. This choice affects: Your monthly principal and interest payment . Your interest rate .

What are the terms of payment in a loan?

Loan terms refer to the terms and conditions involved when borrowing money. This can include the loan's repayment period, the interest rate and fees associated with the loan, penalty fees borrowers might be charged, and any other special conditions that may apply .

What is the relationship between the term of a loan and the monthly payment?

Interest rates are generally lower for shorter-term loans, but the monthly payments are higher . Conversely, longer-term loans have lower monthly payments but higher interest rates.

How does a longer term affect your monthly payment?

Extending your loan's term might give you more time to pay off a debt or lower your monthly payment . But it's not always an option, and extending the term can also lead to paying more interest over the life of the loan.

How are monthly payments affected by down payment rate term and amount?

The amount of your down payment on an installment loan affects your loan amount as well as how much you pay each month. A higher down payment shrinks your loan balance upfront, which means you'll pay less each month. The opposite is true, too, as a lower monthly payment increases your monthly payments .

What is the payment terms process?

Terms of payment set your business's expectations for payment, including when clients pay and what penalties they may receive for missed payments . With this outline, your business can receive payment more easily and make the payment process more transparent to customers.

How are payment terms determined?

These terms refer to the number of days in which a payment is due. For instance, net 30 means that a buyer must settle their account within 30 days of the date listed on the invoice.

How are loan terms calculated?

Calculate the repayment term in months. If you're taking out a 10-year loan, the repayment term is 120 months (12*10). Calculate the interest over the life of the loan. Add 1 to the interest rate, then take that to the power of 120 .

What factors affect the amount of each monthly loan payment?

Your loan amount, interest rate, down payment and loan term are among the factors used to determine your monthly car loan payment.

What effect can a longer loan term have on the monthly payment and on the total cost of the car?

Although a longer-term loan can lower the monthly payment , the total interest paid is higher, leading to a higher total cost for the car.

How is a monthly payment affected by a higher interest rate?

For fixed-term loans, like mortgages, a rate increase means a higher monthly payment. For revolving accounts, like credit cards or lines of credit, higher rates mean less of your monthly payment goes to the principal, so it will take longer to pay off your balance .

What is the impact of different term lengths on monthly payments and total amount paid for the vehicle?

But the more your loan is stretched out, the more interest you pay over the life of your loan. So while your monthly payment may be smaller, the total amount you spend will not be the same. Along with that, longer-term lengths typically come with higher average interest rates .

How Loan Terms Affect Payments (2024)

Posted September 02, 2021

When companies consider financing the purchase of a new or used piece of equipment, the monthly payment amount can be critical. In many cases, the target amount of the payment is determined based upon cash flow needs or what the business can afford.

When determining how you will attain your target payment, you need to focus on two questions.

What Factors Affect the Monthly Payment?

There are three main factors used to calculate the monthly payment for a loan:

Interest Rate
Length of the Loan
Total Amount Financed

To decrease your monthly payment, you need to do one of the following: reduce the interest rate, extend the length of the loan, or reduce the total amount financed with a higher down payment. But which of these has the greatest impact?

Loan Term impact on Monthly Payments

“What is your interest rate?” This is typically the first question asked by prospective borrowers. However, as noted above, interest rate is only one component of the payment, and it’s NOT the component with the greatest impact. The infographic below provides some calculations to show that term and principal have a much greater impact on your monthly equipment loan payment.

Option 1: Reduce the interest rate

Consider a $150,000 loan with a term of 30 months. If the interest rate is reduced by a full percentage point, going from a 10% to a 9% interest rate, the monthly payment is only $70.04 less per month.

Option 2: Extend the term

If you take the same loan ($150,000 loan with a 10% interest rate) and extend the term from 30 months to 33 months, payments are lowered by $453.33 each month.

Option 3: Reduce the principal loan amount with a higher down payment

If you take the same loan and reduce the principal by 10% with a higher down payment (decreasing the loan amount to $135,000), the savings is $567.65 each month.

Not all of these options may be available to every company. That’s why you need a knowledgeable financing partner to put together financing that meets your needs.

refinance to lower monthly payments

Of course, the best time to evaluate your options is at the start of a loan or equipment purchase. However, it is possible to lower monthly payments on existing equipment loans by refinancing them. You may be able to extend the term of a new loan beyond your existing term length or make a partial principal paydown of the existing debt, substantially reducing your monthly payment.

Keep in mind that not all lenders are willing to refinance existing loans. Whether you’re looking for construction equipment financing, manufacturing equipment financing, transportation financing or waste equipment financing, you will want a lender that understands your business and your equipment, is able to evaluate your existing equipment and the associated equity, and customize a loan to fit your business and cash flow needs.

Choosing the Best Equipment Finance Company for Your Business

When financing your equipment, you’ll have the option to work with a bank, captive finance company or an independent lender. Each one of them has their advantages and limitations, so consider these when choosing the right lender for your business:

Banks can sometimes get you the best interest rate, but their limited equipment and industry knowledge oftentimes restricts them from lending to growing businesses or companies that are tight on cash during seasonal months. They often lack familiarity with the equipment you may be financing or how your business uses that equipment, thus not having the ability to truly customize a loan to meet your needs.
Captive finance companies are very knowledgeable about the equipment in your industry, but they will only finance their own brand. You won’t have the option to consolidate your existing equipment loans with this type of lender unless all your equipment is made by the same manufacturer. Further, they are, at times, unwilling to refinance equipment they have already sold.
Independent lenders like Commercial Credit Group (CCG) have dedicated representatives in your industry that are able to recognize the value of your equipment and how you use it. This allows CCG to offer flexible equipment financing and debt consolidation loans for equipment from multiple equipment manufacturers.

CCG is not looking for cookie-cutter deals like a typical bank. Instead, we listen to your story and create a loan that meets the needs of your business. If you’re trying to determine the best option for your equipment loan, we can evaluate your equipment, look at your business and provide options to help meet your goals.

For more information, or to see if you qualify, contact us today.