What does “Theoretical maturity” mean for a Loan?

Not long ago we wrote about difficult words when taking out a mortgage. Research showed that more than 40% of people with a mortgage have difficulty with mortgage terms. When applying for a loan, you also have to deal with words that you do not use every day.

Your loan and the theoretical term

Your loan and the theoretical term

I recently received a question about theoretical duration. With a personal loan, why do we simply talk about term and in the case of a continuous loan about theoretical term? What exactly does theoretical maturity mean and why can it differ from the real maturity of a loan?

Duration ofcontinuous loan

Duration ofcontinuous loan

The theoretical duration of a loan is the duration of that loan under certain conditions:

  • The interest rate remains the same.
  • The loan amount is fully included.
  • The repaid amounts will not be withdrawn.
  • The installments are paid.
  • The loan amount is not changed in the interim.

The theoretical duration of an ongoing loan is an example. This will give you an idea of ​​the progress of your loan under the aforementioned circumstances.

Continuous loan: flexible loan

Continuous loan: flexible loan

But let flexibility now be one of the characteristics of a continuous loan. You can take out and repay this loan whenever you want. The continuous loan also has a variable interest rate.

So there is a good chance that one of the above points will change at a given moment. This will of course affect the time that your loan runs. As a result, the current duration differs from the theoretical duration calculated in advance.

Duration of personal loan

With a choice for a personal loan you opt for security instead of flexibility. A personal loan means borrowing a fixed amount at a fixed interest rate and paying off your loan in fixed monthly installments.

So you know exactly where you stand, including the duration. In other words: the conditions remain the same. That is why with a personal loan the term is ‘just’ the term.

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