What is a Term Loan?

A term loan is a loan taken for a set period (or “term”) that has a fixed repayment schedule. The borrower agrees to repay the principal amount plus interest over a specified timeframe, through monthly installments or EMIs. It is used for buying assets like vehicles or machinery or any business expenses. This loan comes with a fixed or floating interest rate and is secured or unsecured and the amount you can borrow depends on your creditworthiness and financial history.

Types of Term Loans in India:

1. Short-term loans: Generally ranging from 12 to 18 months. Some lenders also offer beyond this limit.

2. Intermediate-term loans: It can go up to 96 months.

3. Long-term loans: Can go up to 30 years

Why it’s Important: Choosing the right term is very important. A shorter term may mean higher EMIs, but you pay less interest overall. A longer term has lower EMIs but costs more in interest over time.

Key Features of Term Loans

• Fixed Loan Tenure: The loan has a predetermined period, allowing you to plan your finances.

• Repayment through EMIs: Term loans are typically repaid in regular EMIs, making budgeting easier.

• Interest Rates: Can be fixed (stays the same) or floating (changes with market rates).

• Purpose-specific: Many term loans, like home or car loans, are designated for a specific use.

• Collateral: Term loans can be secured (backed by collateral) or unsecured (without collateral).

How to Apply for a Term Loan

1. Determine Your Loan Requirement: Assess how much you need and why.

2. Check Eligibility: Make sure you meet the lender’s criteria, which typically include age, income, and credit score requirements.

3. Compare Loan Offers: Look for lenders with the most favorable terms, including low interest rates, manageable EMIs, and flexible tenure.

4. Submit Documents: Provide proof of identity, income, and address, along with specific documents related to the loan purpose (e.g., property papers for a home loan).

5. Loan Approval and Disbursement: Upon approval, the loan amount is disbursed either directly or into your bank account.

Benefits of Taking a Term Loan

• Predictable EMIs: Fixed repayment schedule makes budgeting easier.

• Lower Interest Rates for Secured Loans: Collateral-backed term loans often have better rates.

• Flexible Tenure: You can choose a tenure that suits your financial capacity.

• Builds Credit History: Repaying term loans on time improves your CIBIL Score and overall credit health.

Things to Consider Before Taking a Term Loan

1. Interest Rate: Fixed rates offer consistency, while floating rates may rise or fall with the market.

2. Prepayment Charges: Check if there are fees for repaying the loan early.

3. Loan Processing Fees: These one-time charges can be around 1%-2% of the loan amount.

4. Eligibility Criteria: Lenders have specific age, income, and employment requirements.

5. Loan Tenure: Shorter tenures mean higher EMIs but less interest over the loan period.

How is Interest Calculated on a Term Loan?

Most term loans calculate interest on a reducing balance basis, where interest is charged only on the outstanding principal. This means as you repay the loan, the interest component in each EMI decreases, and the principal component increases.

For example, if you take a loan of ₹10,00,000 at 10% p.a. for 5 years, the EMI will include a mix of interest and principal repayment, which will gradually shift more towards principal over time.

Conclusion

A term loan can be a dependable way to get money for personal use, buying a home, growing a business, or education. By knowing the different types, repayment options, and costs, you can choose a term loan that fits your finances and goals. It's important to compare lenders, check interest rates, and plan your monthly payments to make sure you can repay the loan easily.

Frequently Asked Questions (FAQs)

1. Is a term loan secured or unsecured?

   • Term loans can be either. Personal loans are usually unsecured, while home and business loans may require collateral.

2. Can I prepay a term loan?

   • Yes, lenders allow prepayment, though some may charge a penalty. Check with your lender before making a prepayment.

3. How does my credit score impact my term loan?

   • A higher credit score can improve your chances of getting a loan at a lower interest rate. In India, a CIBIL score above 750 is generally considered good.

4. Is the interest rate on term loans fixed or floating?

   • It depends. You can choose a fixed rate for stable EMIs or a floating rate that changes with market conditions.