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

August 21, 2023 • 1639 views

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.

Disclaimer

We take utmost care to provide information based on internal data and reliable sources. However, this article and associated web pages provide generic information for reference purposes only. Readers must make an informed decision by reviewing the products offered and the terms and conditions. Business Loan disbursal is at the sole discretion of Poonawalla Fincorp.
*Terms and Conditions apply

poonawalla fincorp team

Poonawalla Fincorp Team

We are a team of expert writers and editors passionate about providing our readers with authentic and valuable information on finance. Our aim is to simplify financial and finance-related concepts. We strive to help our readers become more aware and empowered to make informed financial decisions.

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