If you are borrowing money, the maturity date on your loan is an important date to remember. A loan maturity date is the day when the final payment for your loan is due. Maturity dates can impact interest rates, risk levels of different financial products, and the timelines of loans. Before taking out a loan, you should understand the maturity requirements for various loans, types of maturity dates, and other considerations.
- The maturity date for a loan is when a borrower must make their final payment to repay the loan.
- Maturity dates vary for different investments and loans, such as certificates of deposits (CDs), mortgages, and bonds.
Understanding Loan Maturity Dates
A maturity date is the date when the principal amount of a note, draft, bond, or other debt instrument is due. For loans, the maturity date refers to the date when the loan must be fully repaid, including any accrued interest. Once the final payment is made and all repayment terms are met, the promissory note that records the original debt gets retired. In the case of secured loans, the lender no longer has a claim to the borrower’s assets.
The maturity date functions similarly across debt instruments, such as bonds and CDs, but standard maturity dates may vary. Depending on the type of loan, the payment terms, including the loan maturity date, can change. For example, if you refinance a mortgage or consolidate credit card debt, the terms may need to be renegotiated.
Before signing a loan contract, confirm when the last payment is due. If you borrow $20,000 for a car loan with a 48-month term on January 2, 2023, your loan will mature four years from now, with the final payment on January 2, 2027. Or, if you purchase a home with a 30-year mortgage, the loan would mature on January 2, 2053.
Sometimes, the lender may charge you a prepayment penalty if you pay off your loan early. That is because they miss out on interest if you pay in full before the loan matures. Read the loan terms carefully to plan for this fee if needed.
How Maturity Dates Work For Different Loans and Investments
Certificates of Deposit (CDs)
Certificates of deposits (CDs) are a type of savings product that pays interest on a lump sum for a specified period. While they have moderate growth opportunities, they are relatively stable compared to stocks. If a CD is FDIC-insured (Federal Deposit Insurance Corporation), up to $250,000 of your money is protected by the government in case the bank goes under.
A two-year CD has a maturity date of 24 months from when it gets established, meaning the issuer repays the investor the principal balance at the end of the two years. For instance, if you deposit $5,000 into a Marcus by Goldman Sachs CD account for two years, you can earn $497 in interest when it matures (as of November 2023).
After maturity, you can withdraw the money or start another CD term. In some instances, if you do not withdraw the funds within a specified timeframe, the CD may automatically renew. However, if you take the funds out before the maturity date, you may need to pay early withdrawal fees.
Most people take out a mortgage from a bank or mortgage company to purchase real estate. To secure the loan, you would pledge the property itself as collateral for the loan, and the lender provides funds that you repay over an agreed-upon period, usually through monthly payments. The mortgage specifies the loan terms, including the interest rate, repayment schedule, and other conditions.
After you get approved for a mortgage loan, you and the lender will decide on a mortgage maturity date. This date reflects the length of the mortgage. Standard mortgage lengths are 15 or 30 years. That means the maturity date for a 15-year mortgage would be 15 years after the mortgage was issued, while a 30-year mortgage would be 30 years after. If you take out a 30-year mortgage on January 1, 2023, the maturity date is January 1, 2053.
The maturity date also determines how much interest you’ll owe. Usually, you’ll pay smaller monthly payments for longer maturity dates, but you will owe more interest. Depending on the lender, you may get charged an early prepayment penalty if you pay off your mortgage before the maturity date.
Bonds are debt securities issued by governments, municipalities, or corporations to raise capital. When you buy a bond, you are essentially lending money to the issuer in exchange for periodic interest payments and the return of the principal amount at maturity. The interest rate, or coupon rate, is predetermined. They provide a relatively stable investment option compared to stocks, making them attractive for income-focused investors.
When a bond matures, you’ll get the face value of the bond, or “par” value, which is the principal amount you loaned to the bond issuer. Typically, you will receive interest twice a year. Certain bonds may take decades to mature, while others may take three to five years. For example, U.S. Treasury bond terms may go up to 30 years. Corporate bonds may mature in three years.
Before investing in bonds, check their credit ratings. U.S. government bonds are generally safe, but company bonds may have higher levels of risk. Additionally, certain bonds may be “callable,” meaning the bond issuer can repay the principal before the maturity date, ending interest payments early.
Bonds with longer terms to maturity typically offer higher coupon rates, but the risk of the bond issue defaulting increases. The more risk you are willing to take on, the higher the potential rewards. Additionally, inflation also rises over time, making these key considerations when choosing which bonds to invest in.
You can find the maturity date in the Authorization, Authentication, and Delivery section of the bond documents. If a company files bankruptcy and defaults on its bonds, as a bondholder, you have a claim on the company’s assets. But, the type of bond (secured or unsecured) you hold determines the priority of your claim. Other creditors may also impact the priority of your claim.
Types of Maturity Dates
There are generally three broad categories of maturity dates used to classify different types of securities:
- Short-Term Maturity: Securities that mature in 1 to 3 years are typically considered short-term.
- Medium-Term Maturity: Securities that mature in 4 to 10 years are usually considered medium-term.
- Long-Term Maturity: Securities that mature in 10 years or more are generally considered long-term.
Frequently Asked Questions (FAQs)
What Happens When a Loan Reaches Its Maturity Date?
Once the maturity date for a loan is reached, the debt agreement ends. The principal and any interest owed to lenders or investors should get completely paid off.
What Happens If You Don’t Pay a Loan By the Maturity Date?
If you do not pay off a loan by the maturity date, it becomes defaulted. That means you’ve failed to meet the loan requirements, and the lender may pursue alternative legal means to get the money back, including suing you or petitioning to withhold money from your paycheck.
How Does Maturity Date Work?
A maturity date is the specific day when the principal amount of a debt is due, such as a mortgage loan or personal loan, plus any interest payments. Maturity dates help determine the length of a loan or investment and can impact interest rates and risk levels associated with different financial products.
Can You Pay Off a Loan Before the Maturity Date?
Yes, you can pay off the loan early for most loans. In most cases, that will help you save money on interest payments, but you may get charged an early repayment fee since the lender loses out on potential interest.
The Bottom Line
Before investing money or taking out a loan, it’s best to understand the risks and terms involved. The risk profiles for different investments can vary depending on the maturity date, while the interest you’ll owe can increase the further out the maturity date is.