What is the Term Loan Interest Rate & How is it Calculated?

Term loan interest rates are the percentage charged on the loan amount, determined by factors such as your credit profile and the loan tenure you select.

This rate is the primary factor determining the total cost of your term loan. It can be either fixed, remaining the same throughout the tenure, or floating, changing with market conditions. Ultimately, these rates directly influence the size of your Equated Monthly Instalments (EMIs).

What is Term Loan Interest Rate
 

Term loan interest rate is calculated as a percentage of the loan amount and directly affects your EMI and the total repayment amount. Lenders set this rate based on your credit score, loan amount, and repayment period. A better credit profile typically gets you a lower rate.

Also Read: Term loans: Types, Benefits, and How They Work

How to Calculate a Term Loan Interest Rate?

Term loan interest rates can be calculated using a simple formula that works as follows: 

Interest Amount = Loan Amount × Interest Rate × Loan Tenure

For example, if an individual or entity opts for a Term loan of ₹1 Lakh with an interest rate of 10% p.a. and a loan tenure of 3 years, their interest would be:
Interest Amount = ₹1 Lakh × 0.10 × 3 = ₹30,000

To calculate the term loan interest rate, you can use the following formula: 
As for the interest rate, the formula is:

Interest Rate = (Interest Amount / (Loan Amount × Loan Tenure)) × 100

Using the above example, the interest rate would come to:

Interest Rate = [₹30,000 / (₹1 Lakh × 3)] × 100 = 10%

The following table demonstrates how the interest rate of a term loan can be calculated using the formula above.

Also Read: Managing Inventory Gaps: How a Business Term Loan Can Help

Factors Affecting the Term Loan Interest Rate

Lenders assess several factors to determine the final interest rate on a term loan, based on the borrower’s risk profile and repayment capacity. Managing these factors well can also help reduce the interest rate offered. Here are the key aspects they consider:

●    Credit Score and History: Your credit score, typically determined by bureaus like CIBIL, is one of the most critical factors. A high score reflects a disciplined repayment history, positioning you as a low-risk borrower. This often results in a more competitive interest rate.
●    Financial Stability and Income: Lenders review your overall financial health to determine your repayment capacity. For individuals, this includes a stable income and employment history. For businesses, they assess revenue, profitability, and cash flow.
●    Loan Amount and Tenure: The loan amount and the repayment tenure also influence the rate. A longer tenure can sometimes mean a slightly higher interest rate, as it extends the lender’s risk over a greater period.
●    Collateral Offered (Secured vs. Unsecured): If you offer collateral (like property or equipment) for a secured loan, it reduces the lender’s risk. This typically results in lower interest rates compared to unsecured loans, which require no collateral and are considered higher risk.
●    Economic Conditions: The prevailing economic climate, including inflation and changes in the Reserve Bank of India’s (RBI) policies, can influence interest rates across the lending industry.

You can use Poonawalla Fincorp’s Business Term loan EMI calculator to get an estimate of your monthly repayments instantly.

Also Read: Different Types of Loans You Can Take to Start a Business

How to Apply for a Term Loan Online? 

Applying for a term loan online is straightforward. Here is a simple step-by-step guide to help you navigate your application:

●    Fill the Online Application Form: Visit the lender’s official website and complete the digital application form with your basic personal, contact, and financial details.
●    Upload Necessary Documents: You will be required to upload scanned copies of essential documents, such as your KYC proofs (PAN and Aadhaar Card) and income statements.
●    Await Verification and Disbursal: After submission, the lender will review your application and verify the provided documents. Once your loan is approved, the amount will be disbursed directly to your registered bank account.

To Conclude

Understanding how Term loan interest rates are calculated helps you make smarter borrowing decisions. Whether you’re expanding your business or funding equipment, knowing what affects your term loan rate ensures better financial planning. Poonawalla Fincorp’s Business Loan offers transparent, competitive rates and a hassle-free application process to help businesses access financing that fits their needs.

FAQs

How is the term loan interest rate calculated?
The interest rate on a term loan is personalised based on your credit score, income, loan amount, and tenure. Lenders use their internal risk assessment models to determine the final rate applicable to your application. The formula to calculate this interest rate is:
Interest Rate = (Interest Amount / (Loan Amount × Loan Tenure)) × 100

What should I keep in mind when applying for a term loan?
Before applying, carefully check the interest rate, processing fees, and repayment tenure to ensure the EMI fits your budget. You should also keep all necessary documents, such as proof of income and KYC, ready to ensure a smooth process.

Are MSMEs eligible for term loans?
Yes, MSMEs are eligible for term loans to fund business needs, such as purchasing new machinery or expanding operations. Approval is subject to the business’s financial health and its ability to meet the lender’s criteria.

Who is eligible for a term loan in India?
Salaried individuals and businesses, including MSMEs, are eligible to apply for a term loan. Your final eligibility depends on your income, credit score, and ability to repay as per the lender’s criteria.

Is a term loan good or bad?
Yes, a term loan is a good financial tool when used for a planned expense, such as education, business expansion, or a medical emergency. It helps manage high costs with structured EMIs, as long as you have a clear repayment plan.

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