Term Loans: Definitions, Classification, Benefits & Eligibility


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Term Loans: Definitions, Classification, Benefits &Amp; Eligibility


A term loan is a loan that is granted for a set period, typically up to 96 months and must be repaid in regular instalments (EMIs). Term loans are provided to firms for various purposes, including expansion and capital expenditure. These loans have a variable interest rate that is determined by the state of the market. Small enterprises with strong financials or individuals both take these loans. Some key advantages of these loans are speedy money disbursal, minimal documentation requirements, and flexible repayment options.

Classification of Term Loans 

Short-term, intermediate-term, and long-term term loans are the three main categories of term loans. Term loans are offered to meet a borrower’s cash needs, considering the following:

  • Required financial resources
  • The capacity of the borrower to repay
  • Regular cash flow and cash on hand are both available

They determine how term loan interest rates change along with other lending terms. These developments come in the following varieties:

Short-term Loans

Those facing unforeseen cash problems or consolidating loans urgently needing cash typically take out short-term loans. It is issued for a period between 12 and 18 months. However, some lenders also provide loans with terms of up to 8 years, or 96 months, as short-term loans. 

Mid-term Loans

Since these loans have a longer period of up to 96 months, financial institutions typically define them as intermediate or mid-term loans. These loans are typically taken to meet the large-budget funding requirements of firms, such as the purchase of machinery, an increase in working capital, etc.

Long-term Loans

Long-term loans are typically taken for investing in certain enterprises, buying real estate, etc. For taking this loan, it is important to provide collateral, although it is only offered for safer investments. Long-term loans have a longer period and are offered at competitive term loan interest rates. These advances can be easily repaid over a lengthy period with the simple EMI option, satisfying the need for lump-sum funding of a business. 

How Do Term Loans Function?

Among the many financing choices accessible, term loans are one of the easiest to use because they include pre-set loan amounts and interest rates, such as EMIs. For a simple grasp of how a term loan operates, let’s look at the explanation below:

  • Set Loan Amount

Term loans include a predetermined amount. Loan values can change depending on the type of term loan selected. The lender’s eligibility requirements must be met to determine the loan amount.

  • Fixed Repayment Term

The amount borrowed in EMIs must be repaid over the specified fixed tenor, as agreed upon when the loan was requested. It is categorized as a short, mid, or long-term loan depending on the repayment length. Every term loan has a repayment plan, and the borrower is required to pay EMIs in accordance with that schedule. The EMI allows the borrower to make quick payments because it includes principal and interest components computed in accordance with the term loan interest rates in effect. Before applying for the loan, you can calculate the EMI using an online calculator.

  • Need For Collateral May or May Not Be There

Depending on the required loan amount, the borrower’s eligibility, and their preferences, term loans might be secured or unsecured. While unsecured term loans, such as those for personal use, businesses, etc.

  • Floating Or Fixed Interest Rates

There are fixed and adjustable interest rate options for term loans. Which form of interest to choose is entirely up to the borrower.

EMI calculation

An equated monthly instalment is a fixed payment made by a borrower to a creditor on a fixed day each month (EMI). Making monthly principal and interest payments over a number of years allows the loan to be returned in full. EMI debtors often are only allowed to make one fixed payment per month. Borrowers benefit from EMIs. After all, they can more easily organize their finances because they know exactly how much they will pay each month for their loan. Lenders profit from loan interest because it provides a steady and constant source of income. This is the distinguishing feature of term loans.

Term Loan EMI Calculator

Advantages of a Term Loan

Borrowers are drawn to term loans because of their numerous advantages. Due to the intense competition in the industry, banks and NBFCs offer term loans at favorable interest rates. If you have a decent credit score, you can bargain for a lower interest rate in addition to what lenders advertise in their brochures or websites. Your chances of obtaining a cheaper interest rate increase if you have a strong credit score. Typically, when interest rates are higher, it is wise to select variable interest rates. In this manner, you might gain over time while planning for a potential rate reduction. A set rate of interest is ideal for short-term loans. Term loans also aid in boosting a company’s cash flow. It lessens the financial strain that enterprises must bear to maintain themselves. Also, depending on the market cycle, you can select the sort of interest rate. Some key advantages of these loans are speedy money disbursal, minimal documentation requirements, and flexible repayment options.

Eligibility Requirements 

Qualifying for a term loan depends on several variables, to list a few:

  • Nationality: Indian
  • Age: 24 to 70 years old
  • Good CIBIL score (typically more than 685)
  • Business ownership needed

Term loans are based on the borrower’s credit history, number of completed projects, and borrower’s background. It also depends on the lender’s business model. The lender must be persuaded that the concept is viable and has the potential to bring in sizable sums of money. The type of mortgage being used as collateral is another crucial factor. When granting a term loan to a firm, the reputation of the enterprise, its financial standing, and its operational efficiency are all taken into consideration. 

Documents needed:

If you satisfy all the requirements for qualifying, you will require several documents to finish the application procedure.

  • KYC documentation, including an Aadhaar, PAN card, passport, utility bills (electricity, telephone, or water), or voter ID (identity, address, and age proofs);
  • Proof that you are the business owner;
  • Financial records of business
  • Properly completed application form and two passport-sized photos
  • Bank statement for the past year
  • Minimal turnover determined by the bank or lender
  • Any further paperwork that the bank or lender may require

Term Loans FAQs:

1. Give classifications of term loans

Term loans can be divided into three categories: short-term term loans, intermediate-term term loans, and long-term term loans. Classification with a durational focus on the loan period.

2. Name some advantages of term loans?

Term loans are provided at cheaper interest rates than loans with shorter terms if they are accessed over a longer period. Also, the interest rates are set and remain the same for the whole loan term. There is a lot of flexibility available with term loans.

3. Is a term loan considered a secure loan or an unsecured loan?

Personal loans, student loans, and most credit cards—all of which can be revolving or term loans—are all examples of unsecured loans.

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