When considering a Term Loan, it's essential to understand the interest rate associated with it. The Term Loan interest rate determines the cost of borrowing and significantly affects the total amount you repay over the loan tenure. In this article, we will explore how to calculate the Term Loan interest rate, the factors that influence it, and valuable tips to reduce interest rates.
What is a Term Loan?

Term loans are mostly offered to businesses for their expansion
and capital expenditure. For these types of loans, financial
institutions provide funds to businesses for expenses such as buying
new machinery or buildings, starting projects or working capital
needs. These loans allow borrowers to arrange funds to make
big-ticket expenses and repay the costs in calculated
instalments.
The repayment tenure for Term Loan can range from
12 months to 300 months depending upon the borrowed amount,
creditworthiness of the borrower and other factors. Since these are
secured loans against the assets bought from the fund, banks offer
lower interest rates. These credit types are a lifesaver for
businesses, allowing them to arrange funds without diluting their
equity.
How to Calculate Term Loan Interest Rate?
Calculating the Term Loan interest rate involves a simple formula. The formula for calculating the interest amount is:
- Interest Amount = Loan Amount × Interest Rate × Loan Tenure
For example, let's consider a Term Loan of ?1 Lakh with an interest rate of 10% per annum and a loan tenure of 3 years. The interest amount can be calculated as follows:
- Interest Amount = ?1 Lakh × 0.10 × 3 = ? 30,000
To calculate the Term Loan interest rate, you can use the following formula:
- Interest Rate = (Interest Amount / (Loan Amount × Loan Tenure)) × 100
Using the example above, the interest rate can be calculated as:
- Interest Rate = {?30,000 / (?1 Lakh × 3)} × 100 = 10%
Loan Amount (in ?) |
Loan Tenure | Interest Rate |
Rs. 1 Lakh | 1 year | 10% |
Rs. 5 Lakh |
2 years | 12% |
Rs. 10 Lakh | 3 years | 14% |
Factors Affecting the Term Loan Interest Rate
Here are some of the most important factors that affect the interest rate of term loans:
- Creditworthiness
Your credit score and credit history play a crucial role in determining the interest rate. A higher credit score usually leads to lower interest rates, reflecting a lower risk profile to lenders.
- Loan Tenure
The loan tenure affects the interest rate. Generally, longer-Term Loans may have slightly higher interest rates compared to shorter-Term Loans due to the increased risk associated with a longer repayment period.
- Economic Factors
The prevailing economic conditions, inflation rates, and the Reserve Bank of India's monetary policy can influence interest rates. During periods of high inflation, interest rates tend to be higher.
ALSO READ :- Pro Tips to Manage Long-Term Personal Loans…!
Tips to Reduce Interest Rates on Term Loans
Before you apply for a Term Loan, remember these tips to avail reduced interest rates:
- Maintain a Good Credit Score
Pay your bills and EMIs on time, minimize credit utilization, and avoid defaults to maintain a good credit score. A higher credit score can help negotiate lower interest rates.
- Compare Lenders
Compare loan offers from different lenders as they may offer varying interest rates and loan terms. Select the suitable option as per your financial situation.
- Opt for Shorter Loan Tenures
If feasible, consider opting for a shorter loan tenure. Shorter loan tenures typically come with lower interest rates, and you can save on interest payments in the long run.
- Offer Collateral
Providing collateral or a guarantor for your loan can help reduce the interest rate. Lenders often consider secured loans as less risky and may offer more favourable interest rates.
Term Loans Offered in India
There are three types of term loans in India, and these are categorised depending on their repayment tenure. Below are the three types of term loans:
- Short-term Loan
Short-term loans are basically credit taken by lenders to meet their short-term capital needs. The loan duration ranges between 12 months and 18 months. These loans can be a lifesaver for companies that do not qualify for longer repayment tenure of loans.
- Intermediate-term Loan
The repayment tenure period for intermediate-term loans varies between 24 months and 60 months. If companies need a higher fund to meet their emergency capital requirement, these loans can help maintain the company’s cash flow. This credit type can be availed by new companies and those who are having problem with their cash flow and working capital needs.
- Long-term Loan
The duration for this type of loan can be anywhere between 60 months and 120 months. Since these loans are basically for a higher amount, businesses need to collateralise their assets. Banks and NBFCs decide the repayment schedule of these loans based on the company’s profit or cash flow recognition. It could be either quarterly or monthly.
How to Apply for a Term Loan Online?
Business Loans can be a great alternative to term loans. If you are looking for a Business Loan, Poonawalla Fincorp emerges as a top lender according to the trust of millions of lenders. Here is a step-by-step guide on how you can apply for a term loan online:
- Step 1: Click on Apply Online
Select the ‘Apply Now’ button and enter all the necessary contact and personal details.
- Step 2: Enter Business Details
Input your business details such as annual turnover, profit and other details.
- Step 3: Undergo Verification
Once you complete the application procedure, representatives from Poonawalla Fincorp will assess your application and verify the provided information.
To Conclude
Understanding the Term Loan interest rate and how it is
calculated is crucial for managing your finances and making informed
borrowing decisions. By calculating the interest rate using the
provided formula, considering the factors that affect interest
rates, and implementing tips to reduce interest rates, you can
optimize your borrowing experience.
At Poonawalla Fincorp, we
offer personalized Personal Loan options with competitive interest
rates, enabling you to achieve your financial goals.
What are
you waiting for click on ‘Apply Now’ and fulfil all your business needs!
Frequently Asked Questions About Term Loan
1. What is Term Loan EMI?
Term Loan
EMI (Equated Monthly Instalment) is the fixed amount paid by a
borrower to a lender at regular intervals, typically on a monthly
basis, to repay a Term Loan. It consists of both the principal
amount and the interest charged on the loan, spread over the loan's
repayment tenure.
2. Is Term Loan Good or Bad?
The suitability of a Term Loan depends on various factors and
individual circumstances. Term Loans can be a beneficial financial
tool when used wisely and for the right purposes. They provide a lump
sum amount upfront, allowing borrowers to meet their financial needs
and goals.
3. What are the things to keep in mind when
applying for a term loan?
Term Loans often offer
lower interest rates compared to other forms of credit, such as
credit cards. However, it's crucial to carefully consider the terms
and conditions, interest rates, repayment ability, and the purpose
of the loan before deciding if a Term Loan is good or bad for your
specific situation. Proper financial planning, understanding the
terms, and making timely repayments can help borrowers maximize the
benefits of a Term Loan.