The term “tenor” is often used interchangeably with “maturity,” but there are some distinct differences between the two. Understanding how tenor in lending works can help you better evaluate financial products. Tenor changes depending on where you’re at in the repayment process. For example, when you take out a 30-year mortgage, it is said to have a 30-year tenor. Once you’ve held the loan for 10 years, it has a 20-year tenor.
How Tenor in Lending Works
Tenor in lending refers to the length of time until a financial contract expires and is often used interchangeably with the term “maturity.” It’s essential to understand how tenor in lending works since it can change the loan terms. For instance, short-term loans often come with more flexible loan terms and lower interest rates. In comparison, longer-term loans come with higher interest rates. Tenor is especially important in credit default swaps. Credit default swaps are basically insurance policies that protect against default on a bond issuer. One lender can swap its risk with another lender. However, the credit default swap must match the tenor between the contract and the asset’s maturity. The standard tenor on a credit default swap is five years.
Types of Tenor
Tenor in lending typically refers to the following types of lending products.
Bank Loans
When you take out a bank loan, tenor refers to the length of time until the loan is due. For example, when you take out a five-year loan, you have a five-year tenor. Once you’re three years into repaying the loan, you have a two-year tenor.
Insurance Products
When you purchase an insurance product, tenor refers to the length of time until the financial product expires. For example, if you buy a 20-year term life insurance policy and have been making payments for five years, you have a 15-year tenor.
Tenor vs. Maturity
You’ll often hear tenor and maturity used interchangeably, and there are many similarities between the two terms. Let’s look at some of the biggest differences between tenor and maturity. In many cases, high-tenor loans are seen as riskier for the lender. In comparison, maturity refers to the period when the interest must be repaid, and it’s usually used to describe corporate and government bonds. Here’s the easiest way to sum up the difference between tenor and maturity: If you’re five years into a 10-year loan term, you have a five-year tenor. But regardless of where you are in the repayment process, your maturity is 10 years.
