The period of time over which a borrower pays back a loan is known as the amortization period. The amortization period is the amount of time it will take to repay the loan by making payments of principal (which reduces the balance) and interest (which the bank charges to lend the money). Amortization depends on the type and terms of the loan.
Mortgages
A mortgage loan provides financing for the purchase or refinance of real estate. Mortgages provide the most flexibility for amortization. The most common mortgage amortization terms offered by lenders are 10, 15, 20, 25 and 30 years. Some lenders have even been known to go up to 40 years. The interest rate is higher for longer amortization periods, but the payments are lower.
Term Loans
Term loans finance the purchase or maintenance of non-real estate assets, such as equipment. Since term loans are secured by depreciating assets, the terms are usually only as long as the useful life of the asset. Typical amortization periods for term loans are 36, 60, 84 and 120 months. 120-month amortization periods are less common, as the useful life of most equipment rarely exceeds seven years.
Auto Loans
Auto loans finance the purchase of a vehicle. Amortization periods usually run a maximum of 84 months. Since automobiles are equipment, the useful life doesn't run more than seven years. Even 84-month amortization periods are less common. Typical auto loans are amortized between 36 and 60 months.
Personal Loans
Personal loans are a bit more sporadic with amortization periods. A personal loan is an unsecured loan without a specific purpose. Interest rates are high, often exceeding 10 percent. Since the debt is unsecured, amortization periods don't run as long. Sixty to 84 months is the typical amortization period on a personal loan.
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