What Is the Maturity Date on a Loan?
Whether you're thinking of becoming a borrower or a lender, the maturity date on a loan is a key piece of information to know. Maturity dates come into play whether you're attempting to pay off a loan or cash in an investment like a government bond. We'll give you a crash course in what a loan maturity date is and what you need to know about it.
What Is the Maturity Date on a Loan?
To put it simply, a loan's maturity date is the date when the loan must be paid in full. If you're the borrower and have taken out a loan such as a mortgage, then your lender will most likely make sure you stay well aware of the loan's impending maturity date.
In the case of a mortgage, you'll generally have two choices when the loan reaches maturity. You can either finish paying off the loan in full or attempt to refinance it with the lender. In the case of secured loans, the maturity date is also when the lender will cease to have any authority over any assets the borrower may have provided as collateral.
If, on the other hand, you're the lender then maturity dates tend to be a lot more fun. In this case, your loan's maturity date means that the borrower has to repay you your principal, plus any interest owed.
What Does Maturity Date Mean?
When it comes to investing, a maturity date usually refers to the date when you'll be able to reap the rewards of your investment. Generally, the two main types of investments you can make are either equities or debt instruments. Equities refer to investing in something that you'll own, such as stocks or real estate. Debt instruments refer to loans you give out in order to profit from interest.
Some common types of debt instruments that you can invest in include things like:
- Government loans such as treasury bonds, notes, and bills
- Savings accounts; while they may not seem like investments, they're technically a loan to your bank. You earn interest in the form of an APY, even though it's generally pretty low due to the fact that you can take out the money any time.
- Certificates of Deposit (CDs)
- Corporate and municipal bonds
- Commercial Papers
How Do Loan Maturity Dates Work?
It depends on whether you are the borrower or the lender. If you're the borrower, the maturity date is the final due date on the loan. The loan and any interest it's incurred will ideally be paid off in full unless you make arrangements to refinance. When the loan is paid off, the lender can no longer collect interest on it.
For this reason, you may be able to save yourself some money if you're able to pay off a loan before the maturity date. Since the lender will no longer be able to collect interest from you, however, you'll want to check to make sure that they don't impose early payment fees. If they do, you'll want to compare them to the amount of money you'd save by dodging the remaining interest payments.
In the case of debt instruments, the maturity date is when you'll get your investment plus any remaining interest back. Interest works differently depending on the type of debt instrument you're investing in. For example, treasury and municipal bonds pay interest twice a year for the duration of the loan. Savings bonds, on the other hand, payout both the principal and any interest acquired over the life of the loan in one lump sum when they are cashed in.
How to Calculate Maturity Date
Knowing the maturity date of a loan is also an important part of calculating the total amount the lender will ultimately receive when you factor in interest. This is called the maturity value and it's a helpful thing to know if you're thinking of investing in a debt instrument. In order to go about these calculations, you'll need to know several pieces of information:
- P= The original principal amount
- r= the interest rate per period on the loan
- n= the number of compounding intervals from the date the loan starts until it reaches its maturity date.
Once you have these numbers, you'll be able to calculate V= the maturity value using the formula below.
Maturity Date Formula
To calculate the maturity value, plug the numbers from above into the following formula:
V = P x (1 + r)^n
If you are using this formula to calculate the return you'll get from investing in a debt instrument, it's important to note that the maturity value will give you the return you'll get overall. Whether you'll receive all of it on the maturity date will depend on the type of investment.
Some types of investments pay out interest twice every year, for example. In those instances, you'll need to subtract the interest you'll earn before the maturity date from the maturity value in order to see how much you'll actually receive in your final payment. In other words, when the maturity date arrives, you'll usually only get one extra interest payment plus the initial principal on the maturity date itself.
Loan Maturity Date Examples
Let's look at a quick example to give you an idea of how the formula works. Say that an investor named Bob invests $10,000 in a debt instrument that has a compounded interest rate of 8% per year. If the loan's maturity date is three years from the date of his investment, how much will he make from the loan?
In this example, Bob's maturity value (V) would be calculated by using the following numbers:
So our formula would be:
V = 10,000 x (1 + 8%)^3
A bit of math reveals that upon Bob's maturity date, his maturity value would be: $12,597.12. By subtracting his initial $10,000 principal, we can see that he's earned $2,597.12
If you're still a tad confused or if math just isn't really your thing, rest assured that there are plenty of free maturity value calculators online that will handle the calculations for you. If your investment is a government bond, then you can log into your account at treasurydirect.gov to track its value if it's an electronic investment or get an update on your paper bond's value on the tools section of their website.