Loan Maturity Date: What It Means For Borrowers And Investors
Miranda Crace4-Minute Read
UPDATED: November 14, 2023
If you’ve ever taken out a loan or purchased a bond, you might’ve heard the term “maturity date” used at some point. But, what does it mean? A maturity date refers to the day an installment loan or investment product is due in full.
Let’s take a closer look at how a maturity date works and why it’s important to both investors and borrowers.
What Is A Maturity Date?
A maturity date is the date when a financial product’s principal amount is due in full. This means that all principal and interest payments should have been made and the debt is now settled. You can find the maturity date for a debt or investment account by looking at the promissory note you received when you agreed to take on the debt.
It’s also important to know that maturity dates can fall into one of three categories:
- Short-term: A short-term maturity may last up to a year.
- Medium-term: A medium-term maturity typically stretches between 1 – 10 years.
- Long-term: A long-term maturity can signify any debt lasting 10 years or more.
What Does A Maturity Date Mean On A Loan?
For an installment loan, the maturity date is the day of the final loan payment. This date is set based on the loan’s repayment period – how long the borrower has to repay the loan amount. A mortgage could come with a long-term maturity, while a personal loan could be considered short- to medium-term.
How Does A Maturity Date Work?
A maturity date functions as a due date for a debt, which can be a loan you’ve borrowed – like a personal loan or a mortgage – or an investment you’ve made, such as a bond or certificate of deposit (CD). Up next, we’ll further explain how a maturity date works for both loans and investments.
When you receive an installment loan, your lender will determine the maturity date, which will always be at the end of the loan’s repayment term. Throughout the term, you’ll make regular installments – typically on a monthly basis – to your lender until the borrowed amount is fully paid off.
If you make consistent on-time payments, your loan should be completely repaid on the maturity date. However, if you make extra payments, you can pay off the loan ahead of schedule and avoid accruing additional interest. On the other hand, if you’ve missed payments, you may still have a remaining balance after the maturity date. In that case, you’ll need to contact your lender about settling your debt.
For example, let’s suppose you take out a personal loan with a 36-month term. This means your maturity date will be 36 months from the day you receive the loan. So, if you collected the loan on January 1, 2023, your lender would give you a maturity date of January 1, 2026. In other words, if you make all your scheduled payments, your loan will be paid off and closed in exactly three years.
Investment products can also have a maturity date, depending on the type of investment. Certificates of deposit (CDs) and some types of savings bonds are some common examples of products that will pay out interest or dividends over their term. When the maturity date is reached, you’ll receive your initial investment back.
For instance, maybe you purchase a short-term bond for $2,000. Over the next 2 years, you’ll receive interest payments from the company that issued the bond. Once you reach the 2-year mark, the company will pay back the $2,000 you invested. If you wish, you can reinvest that money into a new bond or use it for a different investment.
Why Is A Maturity Date Important?
Maturity dates are important because they determine how long a loan or investment will last. If you’re an investor, the date on a bond or CD will determine how long you’ll receive interest payments from the issuer.
If you’re a borrower, a maturity date determines how long you’ll be making monthly payments and – depending on the type of loan you use – signifies how long the lender will have a claim on your collateral. For instance, the lender will put a lien on your home if you have a mortgage. But after the maturity date and once the loan amount is repaid, the lien will be released and the lender will no longer be able to seize your house through foreclosure.
A loan’s maturity date can also affect the interest rate you secure. In most cases, a long-term loan will carry a higher interest rate than a short-term loan. That’s because the lender is likely to face more risks over a longer period of time.
FAQs About The Maturity Date Of A Loan
Learn more about loan maturity dates with the answers to these frequently asked questions.
How is a loan’s maturity date determined?
A maturity date is determined by the lender, the type of loan and is based on the length of time it will take to repay the amount borrowed. For example, a 30-year mortgage has a 30-year repayment term. This means the maturity date will be 30 years from the date the lender issued the home loan.
What is the purpose of a maturity date?
The maturity date is the due date of the final payment on an installment loan. It also specifies the amount of time that interest will accumulate and how long the lender will have a claim on the borrower’s collateral.
Can I change the maturity date of my loan?
Changing a loan’s maturity date is possible in more than one way. Some lenders offer borrowers the option to modify their loan terms. In this case, a borrower could adjust their repayment term and in so doing change the date.
You can also choose to refinance your loan, meaning you’ll technically be paying off your existing loan with a new one. However, your new loan will come with a new maturity date.
How is a maturity date different from an expiration date?
You may hear the term “expiration date” used interchangeably with maturity date, but the two aren’t the same. An expiration date is the time limit on when an investment can be exchanged. For example, a stock may have an expiration date and no longer be tradable once that date arrives.
No matter if you’re an investor looking to buy bonds or a borrower interested in a loan, understanding what a maturity date is and why it’s important can make you a more informed consumer.
And, if you want to learn more about personal loans and how to use them, discover the best reasons to get one through Rocket LoansSM.
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