Describe a term loan. Definition & Meaning
A term loan, often known as an EMI (Equated Monthly Instalment) loan, is a loan that is granted for a set period of time and must be repaid in regular installments. These loans are typically extended for a longer period of time, which can be anything between one year and thirty years. These loans have variable interest rates that are determined by the state of the market. Small enterprises with strong financial statements or individuals both take these actions.
Now that you are aware of what a term loan is, read the following article to learn more about what a term loan is, as well as its characteristics and benefits.
Various term loan types
Short-term, intermediate-term, and long-term term loans are the three main categories of term loans.
People who are facing unforeseen cash problems or consolidating loans that urgently need cash typically take out short-term loans.
The duration of intermediate long terms, which range from two to five years, calls for some advance planning.
Long-term loans are typically accepted for investing in certain enterprises, buying real estate, etc. For this, a mortgage is necessary, although it is only offered for less hazardous investments and is maintained as collateral.
Attributes of a term loan
- Whatever the company’s (borrower’s) financial situation, the loan has to be paid back throughout the agreed-upon period.
- The risk associated with the proposal, the loan amount requested, and the loan period are all factors that affect the interest rates for term loans. If the loans are not repaid on time, a default may be declared.
- For long-term loans, you must pay the main balance after a period of one to two years.
- While term loans to financial institutions are repaid in equal semi-annual installments, commercial loans are repaid in equal quarterly installments.
- The loan’s servicing burden decreases over time.
- The principal repayment will not change, but the interest will be lower.
Elements that determine a term loan’s eligibility
The qualifying for a term loan depends on several variables. 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.
The paperwork needed for term loans
- Properly completed application form and two passport-sized photos
- Passport, PAN card, Aadhar card, voter’s ID card, driving license, utility bills (electricity, telephone, or water), etc. are examples of KYC documents (identity, address, and age proofs).
- Proof of a business establishment
- Bank statement for the past year
- Minimum turn-over determined by the bank or lender
- Any further paperwork that the bank or lender may require
Amounts paid each month
Equivalent monthly instalment (EMI) is a fixed monthly payment made by a borrower to a creditor on a fixed day each month. 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 because they can more easily organize their personal finances because they know exactly how much they will have to pay each month toward 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.
Calculator for Business Loan EMI
You can keep track of the monthly payments you must make to the creditor in the form of EMIs by using the business loan EMI calculator. To make loan planning simple for business loans in India, Poonawalla Fincorp offers a free Business Loan EMI Calculator. You can use it to calculate business loan EMIs, determine the total amount of interest paid, and view the amortization schedule for a more thorough understanding of payback. You can use the following techniques to determine your business loan’s EMI.
Step 1: Go to the website for the business loan EMI calculator.
Step 2: Type in the necessary loan amount.
Step 3: Enter the interest rate that Poonawalla Fincorp has provided to you.
Step 4: Enter the loan duration in the “Tenure” area.
Step 5: Find the results in the “EMI Amount” column.
Advantages of a Term Loan
Borrowers are drawn to term loans because they offer a number of 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 the ones that lenders advertise in their brochures or on their websites. Your chances of obtaining a cheaper interest rate increase if you have a strong credit score.
Term loans also aid in boosting a company’s cash flow. It lessens the financial strain that enterprises must bear to maintain themselves.
Additionally, dependent on the market cycle, you can select the sort of interest rate. 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.
Q&As for Term Loans
How to Describe term loans?
One of the most frequently asked inquiries by borrowers is, “What is a term loan?” According to the definition of the term loan, it is a loan from a lending institution (bank, NBFC, etc.) that has a set tenure, an established interest rate, and a set schedule for repayment. One year to a maximum of thirty years are the terms of term loans. There are three different forms of term loans, which are further divided into short-, medium-, and long-term loans. The lengths of these various repayment periods vary.
What 3 categories of term loans are there?
Three different categories of term loans exist:
Short-term loan: The borrower might take out a short-term loan to cover any sudden cash needs. A short-term loan has a duration of less than a year.
Intermediate term loan: Loan with a medium repayment duration: Loans with a medium repayment period are used to pay for expenses that can be repaid within two to five years. Compared to a short-term loan, an intermediate-term loan typically requires less planning.
Long-term loan: A loan with a long payback term gives the borrower additional time to pay it back. A long-term loan can be taken out for three to thirty years. A long-term loan requires careful planning because it is longer in duration and has a bigger loan amount than short- and intermediate-term loans.
How long does the long-term loan last?
Long-term loans have a tenure of more than three years. A long-term loan might have a tenure of three to thirty years. Before approving the loan, the borrower and lender agree on the time frame. A long-term loan typically entails a sizable sum that must be repaid over an extended period of time.
Who can obtain a term loan?
To qualify for a term loan, you must have a decent credit score because it establishes your creditworthiness. Additionally, a high credit score enables borrowers to receive a longer term and a lower interest rate. Lenders must confirm your healthy financial standing prior to loan acceptance in order to prevent repayment delays or defaults. You need all the necessary paperwork, such as KYC documents, 12-month bank statements, proof of a minimum amount of turnover, and other essential documents, in order to rapidly obtain a term loan. It would be easier to get approved and get your money if you have all the documentation available.
How is a term loan repaid?
Term loans are repaid by equal monthly instalments, or EMIs. Every month on a set day, the EMIs are debited from the borrower’s account. If the borrower has extra money, they may pay the additional sum in addition to the EMI. This is referred to as partial prepayment, and it’s a good approach to lighten your financial load going forward.
What is a term loan example?
Term loans come in a variety of forms depending on their purpose, including personal loans, loans for education, homes, cars, and more. The period, loan size, interest rate, and repayment terms vary in each scenario. Loans can be categorized as secured or unsecured depending on whether collateral is present or absent. Home loans, auto loans, loans secured by property, etc. are some examples of secured loans. Personal loans, business loans, professional loans, etc. are a few examples of unsecured loans.