Tenor in lending is the length of time until a financial contract expires, and it can be given in years, months, or days. Tenor usually refers to bank loans and insurance products. High-tenor contracts are often seen as riskier for the lender.
Definition and Example of Tenor in Lending
Tenor in lending refers to the length of time until a financial contract expires, specifically in how long it will take a borrower to repay a loan. The loan structure is often based on the tenor, and short-term loans are structured differently than long-term loans.
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.
The most significant difference between tenor and maturity is that the maturity remains constant, while the tenor does not.
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.
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.
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.
|The length of time until a lending product expires||The period when the principal must be repaid|
|Often used to describe bank loans and insurance products||Often used to describe corporate and government bonds|
Tenor in lending refers to the length of time until a lending product expires. It’s often used to describe bank loans and insurance products.
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.
- Tenor in lending is the length of time until a financial product expires, and it can be given in years, months, or days.
- Tenor typically refers to bank loans and insurance products.
- High-tenor loans are typically seen as riskier to the lender.
- Tenor and maturity are often used interchangeably, and while they have similar meanings, there are differences between the two terms.
- Maturity is the period when the principal must be repaid, and it typically applies to government and corporate bonds.
Urban-Brookings Tax Policy Center. “Taxation of Credit Derivatives,” Page 3.