what is a term loan

Term Loans: Definitions, Classification, Benefits & Eligibility

July 14, 2022 • 212 views

What is Term loan?

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 Instalment). These loans are usually extended for a longer duration of time which may range from 1 year to as long as 30 years. The rate of interest charged under these loans is not fixed and depends on the market conditions. These are taken by either small businesses that have sound financial statements or by individuals. 

Read the following article to get a better understanding of what is a term loan, its features and its advantages.

Types of term loans

There are basically three types of term loans, short-term, intermediate-term, and long-term. 

1.    Short-term loans are generally taken by people who are facing unexpected cash shortages or to consolidate some loans that require cash urgently. 
2.    Intermediate long terms are taken for a period of around 2 to 5 years and require a little planning.
3.    Long-term loans are generally taken for purchasing real estate or investing in some businesses etc. These require some mortgage that is kept as collateral and is only provided for less risky investments.

Features of term loan

-    Regardless of the company's (borrower's) financial status, the loan must be repaid over the specified term.
-    The interest rates are based on the risk of the proposal, the amount of the loan that is asked for, and the tenure for which the loan has been taken. 
-    A default can be issued if the loans are not paid on time. 
-    You have to pay the principal amount after a period of 1 to 2 years for long-term loans. 
-    Commercial loans are repayable in equal quarterly instalments whereas financial institutions’ term loans are repayable in equal semi-annual instalments. 
-    Servicing burden of the loan declines over time. 
-    The interest will be less, and the principal repayment will remain constant.

Factors that affect the eligibility of term loans

Various factors affect the eligibility for term loans. Term loans depend on the background of the people who are seeking loans, the borrower’s credit score and how many projects they have done. It also depends on the business plan that the lender has. The lender has to be convinced that the idea is feasible and that it can generate handsome revenues. Another important thing is the type of mortgage that is being offered as collateral. If it's a business then the credibility of the business, the financial performance and the operational effectiveness are also kept in mind while giving a term loan.

Documents required for term loans

  • Duly filled application form with passport-sized photographs
  • KYC Documents (Identity, Address, and Age Proofs) – Passport, PAN card, Aadhar Card, Voter’s ID card, Driving License, Utility Bills (Electricity, Telephone or Water), etc.
  • Business establishment proof
  • Last 12 months’ bank statement
  • Minimum turnover as per bank or lender
  • Any other document required by the bank or lender

Monthly instalments

A predetermined monthly payment paid by a borrower to a creditor on a predetermined date each month is known as an equated monthly instalment (EMI). The loan is repaid in full over a number of years by making monthly payments on the principal and interest. Typically, EMI debtors are only permitted to make one fixed payment every month. An EMI is advantageous to borrowers since it makes personal financial planning simpler because they know exactly how much they will have to pay each month toward their loan. Loan interest benefits lenders since it offers a reliable and consistent stream of income. This is the key characteristic that sets term loans apart.

Business Loan EMI calculator

Business Loan EMI calculator helps you in keeping a track of monthly instalments in the form of EMIs that you need to pay to the creditor. For business loans in India, Poonawalla Fincorp provides a free Business Loan EMI Calculator to make loan planning simple. With it, you can calculate business loan EMI, know the total interest outgo, and access the amortisation schedule for deeper insight into repayment. Here are the few steps you can follow to calculate your business loan EMI.

  • Step 1: Visit the Business Loan EMI Calculator webpage
  • Step 2: Enter the required loan amount
  • Step 3: Enter the interest rate offered to you by Poonawalla Fincorp
  • Step 4: Input the loan duration under section ‘Tenure’
  • Step 5: View the results under the section ‘EMI Amount’ 

Advantages of having a term loan

Term loans are offered at lower interest rates than those with a shorter term making them very flexible. Not only this but you can also negotiate the interest rate to the time period. They have fixed interest rates and do not vary during the period after the loan is taken. These are also dependent on the credit score you have. So, the better credit score you have, the higher the probability of availing loan at a lesser interest rate. 

Term loans also help in increasing the cash flow of the businesses. These loans are approved quickly, and they can overdraft with a fixed deposit or stock-backed mortgages. It reduces the burden on the capital required to be maintained by businesses. 

Additionally, you can also choose the type of interest rate based on the market cycle. Usually, it is advisable to choose floating interest rates when interest rates are higher. This way, you can be benefited in the long run, anticipating rates may moderate over time. For short-term loans, a fixed rate of interest is preferred. 

The term loans are swiftly authorised, which is a huge aid to companies or even people that need money urgently and need speedy approval. They are ideal for any asset purchase, business expansion or asset overhaul.

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