what is a term loan

Term Loans: Definitions, Classification, Benefits & Eligibility

July 14, 2022 • 2289 views

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 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. 

Now that you know the Term Loan meaning, 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. 

Short-term Loan

Short-term loans are generally taken by people who are facing unexpected cash shortages or to consolidate some loans that require cash urgently. 

Intermediate Loan

Intermediate long terms are taken for a period of around 2 to 5 years and require a little planning.

Long-term Loan

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 term loan 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 term loan eligibility. 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.

Also Read: How To Get A Personal Loan Without Collateral

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’ 

Benefits of Term Loan

There are several benefits of term loans that attract borrowers to avail of a term loan. Term loans are offered at attractive interest rates by banks and NBFCs due to the highly competitive market. Apart from the rates offered by lenders in their brochures or on their websites, you can negotiate for a lower interest rate if you have a good credit score. A healthy credit score increases your chance of getting a lower interest rate.

Term loans also help in increasing the cash flow of businesses. It reduces the burden of 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 that rates may moderate over time. For short-term loans, a fixed rate of interest is preferred. 

Term Loan - FAQs

  1. What are term loans?

‘What is term loan’ is one of the most commonly asked questions by borrowers. The term loan definition states that it is a loan from a lending institution (bank, NBFC, etc.) with a fixed tenure, a pre-determined interest rate and a repayment schedule. Term loans range from 1 year to a maximum of 30 years. There are three types of term loans which are further categorized as short-term loan, intermediate-term loan and long-term loan. These different types have different repayment tenures.

  1. What are the 3 types of term loans?

Term Loans are classified into three different types:

  • Short-term loan: A short-term loan is availed to meet any urgent cash requirement by the borrower. In the case of a short-term loan, the period is less than a year.
  • Intermediate term loan: Intermediate term loan is availed to meet financial obligations that can be paid off between the period of 2 and 5 years. Usually, an intermediate-term loan requires little planning as compared to a short-term loan. 
  • Long-term loan: A Long-term loan offers the borrower more period for repayment. The period for a long-term loan ranges from 3 to 30 years.  Unlike, short and intermediate-term loans, a long-term loan requires heavy planning as the loan amount is on the higher side and the duration is also a lot.
  1. How long is the duration of the long-term loan?

Long-term loans are loans with more than a 3-year tenure. For a long-term loan, the tenure ranges from 3 to 30 years. The period is pre-decided between the borrower and lender before loan approval. A long-term loan generally consists of a large amount that requires a long period to pay off.

  1. Who is eligible for a term loan?

A good credit score is a must to avail of a term loan as it determines the creditworthiness of the borrower. Alongside this, a good credit score helps borrowers in getting a lower interest rate and a longer tenure. Before your loan approval, a lender has to ensure that you have a sound financial background to avoid any delay in repayment or to avoid a default. To avail term loan quickly, you need all the documents required for term loan including KYC documents, bank statements of 12 months, minimum turnover requirement, and other required documents. If you have all the documents required for term loan ready with you, approval and disbursal will be quicker.

  1. How do you repay a term loan?

A term loan is repaid in fixed monthly payments or EMIs. The EMIs 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 your future payment burden.

  1. What is an example of a term loan?

Term loans are of different types based on their utility such as - Personal Loan, Education Loan, Home 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 Home Loan, Car Loan, Loan Against Property, etc. Examples of unsecured loans are Personal Loan, Business Loan, Professional Loan, etc.

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