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Whether you're borrowing or investing, the maturity date on your loan or investment is an important day to mark on your calendar. A maturity date is the date when the final payment is due for a loan, bond or other financial product. It also indicates the period of time in which investors or lenders will receive interest payments. Here's how maturity dates work for loans and investments.
How Maturity Dates Work for Loans
A maturity date on a loan is the date it's scheduled to be paid in full. The loan and any accrued interest should ideally be paid off in full if you've made regular and timely payments. If you do have a remaining balance past your maturity date, you'll have to work with the lender to figure out how to pay it off.
Check your loan contract to see the day of the last payment or maturity date. Say you borrow $20,000 for a car with a 60-month term on March 4, 2022. Your loan would mature five years from now, with the final payment on March 4, 2027.
For a home purchase, your loan maturity date could be several decades down the line depending on the term. For example, if you buy a $325,000 house with $25,000 down and a 30-year mortgage on March 4, 2022, the loan would mature on March 4, 2052.
One thing to be aware of is that your lender may charge you a fee if you pay off your loan before its maturity date. Sometimes lenders charge a fee called a prepayment penalty for early repayment because they miss out on interest if you pay in full before the loan matures. Make sure to read your loan agreement first so you can plan for this penalty if need be.
How Maturity Dates Work for Investments
When you're investing money, the maturity date is the day when you receive the money you've invested in bonds, notes and certificates of deposit (CDs). Here's how maturity works in each instance.
How CD Maturity Works
With a traditional CD, you invest a set amount of money for a period of time with a bank or credit union and get access to the initial deposit plus interest earned when the CD matures. For example, if you deposit $15,000 into a two-year CD at 0.90% APY (annual percentage yield), you would get $15,271.21 when it matures.
After maturity, you're free to withdraw the money or you could start another CD term. In some cases, the CD may be automatically renewed if you don't withdraw within a certain timeframe, so be sure to keep note of the maturity date. If you take money out of a CD before the maturity date, however, you may get hit with early withdrawal fees.
CDs can be a safe way to stash money you need in the short term because interest is typically fixed and guaranteed when the CD matures. With an FDIC-insured CD account, up to $250,000 of your money is also protected in case the bank folds.
How Bond Maturity Works
When a bond matures, you get the bond's face value or "par" value, which is the principal you let the bond issuer borrow. One difference between traditional CDs and bonds is that you may receive interest payments before the bond matures. Typically, this happens twice per year. So if you put $5,000 into a bond, you'll get $5,000 back when it matures, along with semiannual interest payments, which you could pocket or reinvest. This is why some investors use bonds for a regular source of income.
Certain bonds may take decades to mature. For example, U.S. Treasury bond terms may go up to 30 years. U.S. Treasury notes work similarly to bonds, except they may mature in under 10 years. While bonds are fixed-income securities that are considered lower-risk investments, they're not void of risk entirely. There's a chance companies may not be able to pay interest or repay the loan.
Bonds have credit ratings that measure their credit risk, which you can review when comparing investments. Default risk isn't as much of a concern for U.S. government bonds, but company bonds can have varying risk levels to consider.
The Bottom Line
The maturity date is a date when a borrower is scheduled to satisfy the terms of the agreement by making the final payment. This could be you when you make the final payment on a car loan or mortgage. When you're the investor, the borrower could be a bank, municipality, company or government.
Before investing money, it's always a good idea to understand the risks involved. With traditional CDs, your money is safe and the return is guaranteed, so you don't have to worry about not getting your money back. The risk profiles of bonds can vary, and your money isn't guaranteed. Researching performance reports and bond credit ratings can help you make decisions on the right bonds for your portfolio.