For big expenses like business growth, buying equipment, or covering major personal costs, term loans are a common choice. Term loan means it helps in borrowing a set amount of money for a short-term (usually 12-18 months), intermediate-term (usually 2-5 years) or long-term usually 96 months, and paying it back with interest over a set period. Let’s explore the concept in a simple way.
Fixed Tenure: When you take out a loan, there's a set amount of time during which you have to pay it back. This period can be as short as a few months or as long as several years, depending on the loan agreement.
Interest Rate: The rate of interest can be fixed, where the EMI remains the same throughout the tenure, or floating, where the EMI may fluctuate based on market conditions.
Repayment Structure: The loan is repaid in EMIs, which include both the principal and interest components.
Collateral: Depending on the loan amount and the borrower's profile, the loan may be secured (requiring collateral) or unsecured (no collateral required).
Purpose-Specific: Term loans are often used for specific purposes like purchasing equipment, funding a project, or meeting significant personal expenses.
If you need INR 10 lakhs to grow your business, you can get a loan of that amount from the bank. The bank will charge you an interest rate of 12% each year, and you will have to pay back the loan over 5 years. Each monthly payment (EMI) will cover both a part of the loan amount (principal) and the interest charges.
Term loans come in different types depending on how long you need to repay them, why you need the money, and what the borrower requires. There are several main categories of term loans, each designed for different purposes and repayment periods.
What Are They? Short-term loans are loans with a tenure typically ranging from 12 months to 18 months. The loan is best for meeting immediate financial needs, such as working capital requirements or short-term business expansion.
Key Features:
Quick Disbursement: Lenders often disburse short-term loans quickly to meet urgent financial needs.
Higher Interest Rates: Since the tenure is short, the interest rates may be slightly higher compared to long-term loans.
No Collateral Required: These loans are usually unsecured.
What Are They? The medium-term loans are meant to be paid back over 2 to 5 years. They are ideal for funding projects that need time to start making money, like buying equipment, growing a business, or fixing up a property.
Key Features:
Moderate Interest Rates: The interest rates for medium-term loans are generally lower than those for short-term loans but higher than long-term loans.
Collateral: Depending on the loan amount, these loans may be secured or unsecured.
What Are They? Long-term loans have a tenure of up to 30 years. These loans are typically used for substantial investments like purchasing real estate, constructing a factory, or large-scale business expansions.
Key Features:
Lower Interest Rates: Long-term loans usually have lower interest rates due to the extended repayment period.
Collateral Required: These loans are often secured against collateral such as property, equipment, or other assets.
Tax Benefits: For businesses, the interest paid on long-term loans can be claimed as a tax deduction.
Important Note: Picking the best type of term loan depends on how much money you need, how much you can afford to repay, and what your long-term plans are.
This statement means that term loans have many benefits, which is why many people and businesses choose them for borrowing money. It will list some of these main advantages next.
Why It’s Beneficial: Term loans come with a fixed repayment schedule, that’s why it’s easier for borrowers to plan their finances. You know exactly how much you need to pay each month, allowing for better budgeting and financial planning.
Why It’s Beneficial: Whether you need a short-term solution or a long-term investment, term loans offer flexibility in tenure and the best solution for meeting your financial obligations.
Why It’s Beneficial: This statement means that secured term loans, which are guaranteed by valuable assets (collateral), usually have lower interest rates. This lower rate makes borrowing cheaper and the loan more affordable.
Why It’s Beneficial: Term loans make it easier to get money for big expenses without using your own savings or affecting your day-to-day finances. They are a good choice for projects that require a lot of money.
| Aspect | Key Points |
|---|---|
| Definition | A loan where a lump sum amount is borrowed and repaid in regular installments over a fixed tenure. |
| Types | Short-term (12 months to 18 months), Medium-term (2 to 5 years), Long-term (Up to 30 years). |
| Interest Rate | Can be fixed or floating. Secured loans generally offer lower rates. |
| Collateral | Secured loans require collateral, while unsecured loans do not. |
| Benefits | Predictable repayment, flexible tenure, lower interest rates for secured loans, tax benefits, boosts credit score. |
| Application Process | Determine loan requirements, research lenders, check eligibility, gather documents, submit applications, get approval and disbursement. |
This statement means that term loans are important for handling big expenses in a planned way, whether for personal or business use. Knowing the different types of term loans and their advantages helps you pick the right one for your goals. By looking at factors like how long you'll take to repay, the interest rates, and how much you can afford to pay back, you can choose the best loan for your needs.
A term loan provides a lump sum amount that is repaid over a fixed period, while a line of credit allows you to borrow up to a certain limit and repay only the amount used, with flexible repayment terms.
A term loan is a type of loan where you borrow a specific amount of money and agree to repay it with interest over a set period, typically in regular installments.
Interest rates can be fixed (stay the same throughout the loan term) or variable (change based on market conditions). The rate affects the total cost of borrowing.
Secured term loans require collateral (like property or equipment) as security, usually resulting in lower interest rates. Unsecured loans don’t require collateral but may have higher rates.
Term loans can be used for various purposes, including buying equipment, expanding a business, renovating property, or other large expenses.
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