What Does It Mean When a Loan Matures?

Maturity is generally considered a good thing. It improves wine and cheese, and a tomato fully matured on the vine is one of life's great pleasures. Maturity is also something to value in your partner, especially if you've had one or two of the other kind. However, maturity doesn't always mean the same thing. With a loan, for example, it just means the end of your borrowing term. When you sign for a loan, it's important to understand what happens at maturity.

When you sign up for a loan of any kind, you're agreeing to a specific set of terms. You'll be advanced a sum of money, which must be repaid over a specific time. The institution lending the money will charge you interest at a defined rate.

The length of your loan represents a compromise. Shorter terms mean higher payments, but you pay less interest in the end. Longer terms cost more in interest, but reduce your monthly payment. Regardless of the term you choose, your loan is said to "mature" at the end of that period.

Most loans operate on a fairly standard model. The lender structures the payments so that in the early years, most of the money goes to pay interest. That way, they've made their profit if you should fail to keep up the payments. This is why you build so little equity in your home during the first years of a mortgage.

Over time, as you continue to make payments, the balance begins to swing in favor of paying down the capital. At the end of your term, when the loan matures, your last payment means you've fully repaid the loan.

In the real world, there are some variations on the theme. You might be required to pay a fee at the maturity date to officially terminate the loan. In the case of real property, there might also be some legal fees involved in finalizing your ownership.

Loans also vary widely in their treatment of early payment. The lender expects a certain profit from each loan, and if you pay early there may be penalties to offset this lost revenue. However, in competitive markets such as mortgages, lenders often offer liberal prepayment options as a reason for you to bring them your business.

Not all loans adhere to the standard model. With leases, for example, the end of the term doesn't usually mean you own the item you've leased. Typically, you have a choice of returning the merchandise or paying off the balance at a pre-determined rate.

Lease companies often offer incentives to trade in your old car, for example, and start a new term with a late-model vehicle. Some loans allow you to pay only interest during the term, leaving the principal due and payable. It must be paid off as a lump sum, or refinanced as a new loan.