What is Term Loan? All You Need to Know About Term Loans
If you need money to manage your daily expenses or start a new business, you can consider getting a term loan. This type of loan is tailor-made to meet your specific financial need.
What Is a Term Loan?
Term loans are fixed amount loans that are provided by banks or NBFC to be repaid in regular instalments (EMIs) over a specified period of time.
Term loans are often in both fixed and floating interest rate. Generally, for business term loans, the repayment tenure ranges from 12 months to 60 months. And for other loan products home loans or personal loans, the repayment tenure can be up to 10 years or more depending on the interest rate applied and the loan amount disbursed.
Types of Term Loans
There are several varieties of term loans, and the following factors are considered to determine the borrower’s funding requirements:
- Amount of loan needed
- Borrower’s repayment capacity
- Cash flow and in-hand availability of funds
Term loans are available in the following formats:
- Short-term loans
A short-term loan is usually offered for a tenure ranging from 12 to 18 months. Some lenders consider loans of up to 5 years or 60 months as short-term loans. People who borrow short-term loans have immediate, medium-sized funding need, which can be repaid comfortably within a short span of time.
- Intermediate-term loans
Generally, intermediate or mid-term loans are the ones that have a loan tenure ranging from 3 to 5 years. These loans have a significant ticket-size, which can be used for making big-budget funding requirements such as purchasing machinery purchase for business, etc.
- Long-term loans
Usually, long-term loans have tenure that can be as high as 25 years. These type of loans are usually secured and have attractive term loan interest rates and easy EMI options.
Term Loan Category
- Secured Loan:
The applicant has to submit collateral to get a secured term loan from the banks or NBFCs. Collateral submitted can be assets in the form of residential/commercial properties, equipment, etc. The interest rate for a secured term loan is usually on the lower side.
- Unsecured Loan:
Most financial institutions offer unsecured term loans that do not require any collateral or guarantor. As there is a risk of default associated with unsecured loans, lenders usually charge a higher interest rate to minimise the risk factor.
How Do Term Loans Work?
Term loans are the most convenient loan option compared to other financing options. They come with the fixed loan amount, interest rates, EMIs, etc., making it easy to understand how term loan works. Here’s how it works:
- Fixed loan amount
Terms loans have pre-determined loan amount. The loan amount varies depending on the type of term loan you choose. The actual loan amount is determined after meeting the lender’s eligibility criteria.
- Fixed repayment tenure
Your repayment tenure is decided when the loan is processed. You must repay the borrowed amount in EMIs spread across the repayment tenure set for you. The duration of loan repayment can further classify your loan as a short-term, mid-term or long-term loan.
- Unsecured or secured
Depending on your eligibility for the loan amount required and your preference, term loans are offered as both – secured and unsecured. Examples of unsecured loans are personal loans and business loans, which are given to you without collateral. Examples of secured term loans are home loans and car loans, which are offered to you against collateral.
- Fixed or floating interest rate
As term loans can be offered with a fixed or floating rate of interest, you have a choice to choose the type of interest rate you prefer.
- Fixed repayment schedule
Term loans come with a repayment schedule, and you are required to pay the borrowed amount in EMIs based on this schedule. The EMI that you pay is made up of 2 components – the principal component and the interest component. The EMI amount is based on the interest rate and the loan tenure applied to your term loan. You can find the EMI amount prior to applying for a term loan by using an EMI calculator.
Term Loan Eligibility
An applicant should meet the following eligibility criteria to get a term loan:
- Age Limit: 21 years to 65 years
- Indian citizen
- Good credit score
- Regular source of income
Advantages of Term Loans
- Easy to meet eligibility criteria and hassle-free documentation:
With minimum eligibility criteria and just a few basic documents, you can get these loans without any hassles.
- High amount and low-interest rate:
With term loans, you can be eligible for a large amount of loan offered at an interest rate lower than most credit cards.
- Flexible loan tenure:
You have the option to choose the loan repayment tenure depending upon your repayment capacity.
- Affordable EMIs:
You can choose a repayment tenure as per your repayment capacity. Shorter tenure, higher EMIs; longer tenure, lower EMIs.
- Total cost of the loan is known before applying:
During the application process, you have an idea of the total cost of the loan, making it easier for you to budget your finances.
- Interest paid is sometimes tax-deductible:
When you use the term loans for specific purposes such as for business, to buy or construct property and to buy assets, ITA allows deduction on the interest amount paid on the term loan.
Disadvantages of Term Loans
- Long-term EMI repayment burden
- Need to keep track of EMI repayment due dates
- Collateral is needed in some cases
- Need to always pay the EMIs on time
How to Apply for a Term Loan?
You can apply for a term loan online or offline.
In the offline method, you need to visit the branch and carry out the formalities at the bank office.
In the online method, you need to visit the chosen lender’s official website and fill out the online loan application form. Once the form is submitted, the bank’s representative may contact you to proceed with the formalities.