Term Loans: Types, Benefits, and How They Work

If you need a loan to cover substantial financial requirements that can be repaid over a fixed tenure, you may want to consider a term loan. This type of loan is granted for a specific period and must be repaid in regular instalments. Term loans are usually given for a longer duration, ranging from one to 20 years.

In this blog, we'll provide a detailed explanation of this topic, including what is a term loan, its features, types, and advantages. We will also discuss the eligibility criteria and the required documentation associated with term loans. Keep reading to learn more!

What is a Term Loan? Meaning & Definition

A term loan is a loan that is given for a fixed duration of time and must be repaid in regular instalments, also known as EMI (Equated Monthly Instalments). These loans are usually extended for a longer duration of time, which can be as long as 20 years. The rate of interest charged under these loans is not fixed and depends on the market conditions. These loans can be availed of by both businesses and individuals. 

How Does Term Loan Work?

Term loans are a popular form of financing where a borrower receives a lump sum of money from a lender and then repays it over a set period with interest. The interest rate and repayment term are typically fixed, which gives borrowers a predictable payment schedule.

The process for obtaining a term loan typically involves:

1. Filling out the Application Form: Borrowers must fill out an application that includes information about their creditworthiness, business plan, and financial projections.

2. Lender’s Review: The lender will review the application and may require additional documentation or collateral before approving the loan.

3. Loan Approval, Disbursement, and Repayment: Once the loan is approved, the borrower receives the funds and begins making regular payments to the lender. These payments usually consist of both principal and interest and are made on a monthly basis.

Also Read: Working Capital vs. Term Loan - Meaning and Difference

Types of Term Loans

There are three types of term loans that borrowers can choose to apply for, which are: 

1. Short-term Loan

Short-term loans are generally taken by people who are facing unexpected cash shortages or to consolidate existing credit or debt. 

2. Intermediate Loan

Intermediate long-term loans are taken for a period of around 2 to 5 years and require a set repayment plan.

3. Long-term Loan

Long-term loans are generally taken for purchasing or investing in real estate, or for business purposes.

Also Read: A Comparison of Revenue-Based Financing and Term Loans

Features of Term Loan

The various features of a Term Loan are mentioned below:

1. Loan Amount

Term loans come with a fixed loan amount, which might vary depending upon the term loan chosen. It is also essential to meet the lender’s eligibility criteria before determining the loan amount.

2. Repayment Period

A term loan comes with a specified repayment period, which is stated at the time of applying for the loan. These loans are classified into short-, mid-, and long-term loans depending on the loan repayment duration.

3. Loan Category

Term loans come in both secure and unsecured categories. Secured loans require you to keep assets as collateral and unsecured do not require any kind of collateral. For example, a Loan Against Property (secured) or a Personal Loan (unsecured).

4. Interest Rate

Term loans come with fixed interest rates, which are agreed upon by both the lender and the borrower.

Benefits of Term Loan

1. Attractive Interest Rates

Financial institutions like NBFCs offer term loans at attractive interest rates that can start from as low as 9% per annum.

2. Customisation as Per Borrower’s Needs

Borrowers applying for a term loan can choose the amount they wish to borrow. They can also negotiate for a lower interest rate if they have an excellent credit score of 750 and above.

3. Different Types and Categories

Terms loans are available in two categories (secured and secured) and different types. This enables borrowers to choose a term loan that best meets their financial goals.

4. Improve Business Cash Flow

Businesses opting for a term loan can use it to improve their cash flow and lower the reliance on working capital.

Factors that Affect the Eligibility of Term Loans

Various factors affect term loan eligibility, which include:

1. Borrower’s Financial Background

Term loans depend on the background of borrowers, including their credit score, financial details, and more.

2. Business Plan

If the borrower is a business owner, they must provide a robust business plan that states how they plan to use the funds from a term loan.

3. Type of Collateral

Another important consideration borrowers must note before applying for a term loan is the type of asset that is being offered as collateral. Different assets (like a real estate property) can determine the loan amount and interest rate they can avail of from a term loan.

4. Credibility of Borrower

The borrower’s credibility and creditworthiness play a key role in influencing the lending decision of financial institutions. By clearing their debts on time and making timely payments, borrowers can improve their creditworthiness and get term loans at favourable interest rates.

Eligibility Criteria for Term Loans

The basic eligibility criteria for term loans in India include:

• Age: Minimum age must be 18-22 years and maximum age must be 57-65 years.
• Citizenship: Borrower must be an Indian citizen.
• Income: Individuals must have a net take-home salary of Rs. 30,000. Businesses must have a minimum annual turnover of Rs. 6 Lakh.
• CIBIL Score: The CIBIL score must be above 700. A score of 750 and above is more favourable.

Note: The above-mentioned eligibility criteria for term loans is indicative and can vary among different lenders.

Documents Required for Term Loans

The list of documents required when applying for a term loan include:

• KYC Documents (Identity, Address, and Age Proof): Passport, PAN card, Aadhaar Card, Voter’s ID card, Driving Licence
• Business Address Proof: Utility bills (electricity, telephone, or water)
• Financial Documents: Bank statements from the last 6 months.

Note: The list of documents mentioned above is indicative. Borrowers may be required to submit additional details at the time of applying for the loan.

How to Apply for a Term Loan Online

To apply for a term loan, borrowers must follow the steps mentioned below:

• Step 1: Visit the lender’s website and click on ‘Apply Now’.
• Step 2: Complete the application form.
• Step 3: Upload the essential documents and click on ‘Submit’.

The approved loan amount will be disbursed to the borrower’s bank account after a successful assessment and verification conducted by the lender.

What are the Monthly Instalments of a Term Loan?

An equated monthly instalment (EMI) is a predetermined monthly payment paid by a borrower to a creditor on a predetermined date each month. The loan is repaid in full over a specific time by making monthly payments on the principal and interest.

EMIs are advantageous to borrowers since it makes financial planning simpler. Borrowers can also use loan EMI calculators to determine the amount they need to repay every month as per the loan amount, tenure, and interest rate.

How to Use a Term Loan EMI Calculator?

A term loan calculator is a tool that allows customers to compute their monthly instalments by filling out details like tenure, loan amount, and repayment schedule.

Business owners can use an online Business Loan EMI calculator offered by NBFCs like Poonawalla Fincorp to check their business term loan EMIs. The steps to get started are specified below:

• Step 1: Visit the ‘Business Loan EMI Calculator’ webpage.
• Step 2: Enter the required loan amount.
• Step 3: Enter the interest rate and loan tenure.
• Step 4: View the approximate EMI value under the ‘EMI Amount’ section 

To Conclude

Term loans can be used for a wide range of purposes, such as purchasing equipment, expanding a business, or refinancing existing debt. However, it's important to remember that the borrower is responsible for repaying the loan in full, even if the business doesn't perform as well as expected.

Overall, term loans can be a useful tool for those who need financing for their specific requirements. By understanding how they work and carefully considering the terms and conditions, borrowers can easily apply for a term loan from reputed financial institutions like Poonawalla Fincorp.

Frequently Asked Questions

• Who is eligible for a term loan?

Borrowers with a good credit score and excellent creditworthiness can apply for a term loan. It is also important to check the eligibility criteria of different lenders before applying for a loan. The basic requirements for loan eligibility include:

1. Age: Minimum 18-22 years and maximum 57-65 years

2. Citizenship: Indian

3. Income: For individuals - Rs. 30,000; for businesses – minimum annual turnover of Rs. 6 Lakh

4. CIBIL Score: 700 and above

• How do you repay a term loan?

A term loan is repaid in fixed monthly payments or EMIs, which are debited from the borrower’s account on a pre-decided date every month. In case the borrower has extra funds, they can pay the extra amount over and above the EMI. This is called partial prepayment and is a good way to reduce future payment burden.

• What is an example of a term loan?

Term loans are of different types based on their purpose. such as - Personal Loan, Education Loan, Car Loan, etc. In each case, the duration, loan amount, interest rate, and repayment terms differ. Based on the presence or absence of collateral, loans can be classified as secured or unsecured. Examples of secured loans are Car Loan, Loan Against Property, etc. Examples of unsecured loans are Personal Loan, Business Loan, Professional Loan, etc.

• What does term out a loan mean?

The accounting method known as "term out" involves capitalising short-term debt into long-term debt without taking on any additional debt. It is one of the best debt management strategies for lending institutions or companies.

• What is better – cash credit or term loan?

The choice between Term Loan and Cash Credit (also known as working capital line of credit) depends on the borrower’s specific business needs and financial circumstances. Both have their advantages and are suitable depending on the purpose. However, in a term loan, borrowers can negotiate for a lower interest rate from the lender if they have a good credit score.