Term or Straight Loans
What are term or straight loans?
Well, up until the 1930s, a term loan was the only thing available to finance the purchase of real estate. In a term or straight loan, the payments made only include interest. In other words, it is nonamortized, which means none of the money paid went towards the principal. Making payments can be done on a periodic basis, such as monthly, quarterly or annually.
How long are straight loans?
Term loans are usually short-term, such as three to five years in duration.
What happens when a term loan matures?
At the end of a term loan the borrower either has to refinance, which was most common. Of course, the borrower could also sell the property to pay the balance owed. Historically, straight loans were simply refinanced with the original or a new lender. However, once the Great Depression hit, borrowers were unable to repay the principal when due. Since the money supply was also minimal during this time, lenders were unable to roll these term loans over and ended up foreclosing on the property. Over a million families lost their homes as a cause.
Are straight or term loans still used today?
Yes, they are. Today straight loans are generally only used in the financing of land and construction.
What replaced term or straight loans?
Amortized loans, where a portion of the payment made goes toward principal replaced term loans. Amortized loans can be either fully amortized, where the entire principal amount is paid off by the end of the loan, or partially amortized where only a portion of the principal is paid off during the payment period. These amortized loans also had longer payment periods, such as a standard fully amortized 30-year loan.
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