What is a term loan?

2 min read

Term loans are short-term loans offered to businesses for capital expenditure and expansion, among others. Generally having a tenor up to 84 months, these loans are tailor-made to suit the various financial needs of businesses. Minimal documentation, quick disbursal of funds and repayment flexibility are some of the major benefits of these loans.

Types of term loans

Term loans are available to suit a borrower’s funding requirements based on factors like:

  • Amount of funding required
  • Repayment capacity of the borrower
  • Regular cash flow and in-hand availability of funds

Based on these, term loan interest rates also vary along with other terms of lending. These advances are available in the following types:

Short-term loans

A short-term loan is a type of advance offered for a duration ranging between 12 to 18 months. Some lenders, however, also consider tenors of up to 5 years or 84 months as short-term loans. Borrowers usually avail of these loans to meet their immediate, medium-sized funding needs that they can repay easily within a short span.

Intermediate-term loans

Financial institutions generally classify intermediate or mid-term loans as they come with a longer tenor of up to 84 months. Available in considerable ticket size, these advances sufficiently make for big-budget funding needs of businesses like purchasing machinery, boosting the working capital, etc.

Long-term loans

Available at attractive term loan interest rates, long-term loans come with an extended tenor. The easy EMI option makes these advances convenient to repay over the long tenor while fulfilling a business’s requirement for lump-sum funding. Usually, such loans are secured in nature.

How does a term loan work?

Among multiple financing options available, term loans are one of the most convenient ones to avail as they come with pre-determined loan value, interest rates, EMIs, etc. Below is explained how a term loan works for an easy understanding of its functioning.

  • Fixed loan amount

Terms loans come with a fixed amount. Depending on the type of term loan chosen, the loan value may vary. Meeting the lender’s eligibility criteria is also essential in determining the actual loan amount.

  • Fixed tenor of repayment

You must repay the amount availed in EMIs throughout a fixed tenor as determined while availing the loan. Depending on loan repayment duration, it is classified as a short, mid or long-term loan.

  • May or may not require collateral

Depending on the loan amount required, borrower’s eligibility and choice, term loans are available as both secured and unsecured credits. While personal loans, business loans, etc., are unsecured forms of term loans, advances like home loans qualify as secured term loans sanctioned against collateral.

  • Fixed or floating interest rate

Term loans are available at both fixed and floating rates of interest. It is up to the borrower to decide which type of interest to opt for.

  • Fixed repayment schedule

Every term loan comes with a repayment schedule, and a borrower must pay EMIs based on this schedule. The EMI comprises the principal and interest components calculated per the term loan interest rates applicable, thus enabling the borrower to repay quickly. You can determine the EMI amount before availing of the loan using an online EMI calculator.

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