In short
A private loan is built from two independent decisions: what happens to interest while it runs, and what brings the capital back. Four combinations occur in practice, and only one of them is a fixed term.
So the useful question is not how long is the term? It is what event returns my capital, and what happens if that event is late? The date in an agreement is the date money becomes due. It is not the date it arrives.
01Two decisions, not one
Every shape is the product of these two, and running them together is what makes the subject feel slippery.
- What happens to interest while the loan runs. It is either paid across to you periodically, or it accrues and is settled later.
- What brings the capital back. Either a date arrives, or a recovery happens.
They are independent. A loan can pay interest every month and still have no date for the return of your capital. Monthly income is not evidence of a term — it is evidence of a borrower who is currently paying.
02The four shapes
| Shape | Interest | Capital | What you are accepting |
|---|---|---|---|
| Interest paid, capital as and when | Paid monthly | Returned in pieces, as recoveries arrive | No date at all. Income is regular; the return of capital is not. |
| Interest and capital both paid | Paid monthly | Repaid monthly alongside it | The most predictable shape, usually the lowest rate. The balance falls from month one. |
| An expiry date | Paid monthly, or accrued to the end | The whole amount on one stated date | A real term — and all of the risk lands on a single day. |
| Everything as and when | Accrues rather than being paid across | Interest and capital together, as collections are made | No income while it runs and no date. The debt grows until something is collected. |
03Due is not arrives
This is the single most expensive misunderstanding in private lending, and it is a matter of vocabulary.
| An investment that matures | A loan that falls due | |
|---|---|---|
| On the date | It pays out | It becomes payable |
| If it does not | Something has gone wrong with the product | The borrower is in default — an ordinary, foreseeable state |
| What follows | A claim against a provider | Payment, delay, restructuring or enforcement |
| Who acts | The provider | You |
A loan does not mature. It falls due, and is then paid, or delayed, or restructured, or enforced. Each of those four is a normal outcome, which is why the question what happens on the day it is not paid? has to be answered before you lend, not after.
Where the National Credit Act applies, the borrower may settle at any time, with or without notice. So on a covered loan the term is a ceiling for you and an option for them. Lesson twelve works through what that does to your planning.
04Secured and unsecured, briefly
Security is lesson eight's subject in full. For now, two sentences, because the words are already being used around you.
- Secured means a specific asset or a specific person stands behind the debt, so that if the borrower does not pay you have a route to something beyond a claim on their general estate.
- Unsecured means you have the borrower's promise and nothing else. This is perfectly ordinary — most consumer credit in the country is unsecured — as long as the price reflects it and you knew.
05Match the loan to the money
The shape is not a feature list to pick from. It is a question about your own circumstances.
| If your money is… | The shape that fits | The shape that does not |
|---|---|---|
| Needed back on a known date | None of them well. This is the wrong home for it. | All four |
| Not needed back, but you want income | Interest paid monthly, capital as and when | Everything as and when |
| Not needed back, income not the point | An accrual shape, usually priced better | Monthly servicing you do not need |
Match the loan to the money, never the other way round. Next: what you hold when several people fund one loan.