Definition and Example of Tenor in Loans
The tenor in a loan refers to the duration of time until the financial contract expires, specifically the period that the borrower will take to repay the loan. The structure of the loan is often shaped by the tenor, and short-term loans differ from long-term loans.
How Tenor Works in Loans
The tenor in a loan refers to the duration of time until the financial contract expires and is often used interchangeably with the term “maturity.” It is important to understand how tenor works in a loan as it can affect the terms of the loan.
For instance, short-term loans often come with more flexible loan terms and lower interest rates. In contrast, long-term loans typically come with higher interest rates.
Note: The biggest difference between tenor and maturity is that maturity remains fixed while tenor does not remain fixed.
Tenor is particularly important in credit default swap transactions. A credit default swap is simply an insurance document that protects against the default on the bond issuer. The lender can swap its risks with another lender. However, the credit default swap must match the tenor between the contract and the maturity of the assets. The standard tenor in a credit default swap is five years.
Types of Tenor
The tenor in a loan typically refers to the following types of financial products:
Bank Loans: When you take out a bank loan, the tenor refers to the duration until the loan is due. For example, when you take out a five-year loan, you have a tenor of five years. Once you have repaid the loan for three years, you have a tenor of two years left.
Insurance Products: When purchasing an insurance product, the tenor refers to the duration until the financial product expires. For example, if you buy a life insurance policy for 20 years and have paid for five years, you have a tenor of 15 years remaining.
Tenor vs. Maturity
You often hear tenor and maturity used interchangeably, and there are many similarities between the two terms. Let’s look at some of the major differences between tenor and maturity.
Tenor: It is the duration until the loan product expires. It is often used to describe bank loans and insurance products.
Maturity: It is the period within which the principal must be paid back. It is generally used to describe government and corporate bonds.
In many cases, long-term loans are considered more risky for the lender. In contrast, maturity refers to the period when interest must be paid, and it is usually used to describe government and corporate bonds.
Here’s the easiest way to summarize the difference between tenor and maturity: If you are in the fifth year of a ten-year loan term, you have a tenor of five years. But no matter where you are in the repayment process, your maturity is still ten years.
Source: https://www.thebalancemoney.com/what-is-tenor-in-lending-5220806
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