What Is a Term Loan?
A term loan is a type of loan where a lender provides a fixed sum of money upfront to a borrower, which is repaid over a specified period through regular instalments called EMIs (Equated Monthly Instalments). The interest rate can be fixed or floating, and term loans are typically used for business expansion, purchasing equipment, property acquisition, or managing working capital needs.
The repayment tenure can vary from short term (few months) to long term (up to 10 years or more), offering borrowers financial stability and predictable monthly payments.
Types of Term Loans
Term loans are generally classified based on their repayment duration as follows:
Short-Term Loans:
Usually repaid within 12 to 18 months. Ideal for covering urgent or operational expenses, short-term loans have higher interest rates due to quick repayment schedules. They can be secured or unsecured.
Intermediate-Term Loans:
Repayment tenure ranges from 1 to 5 years. These loans are used for medium-sized investments like equipment purchases or business expansion, offering moderate interest rates and structured repayment plans.
Long-Term Loans:
With repayment periods of 5 to 10 years or more, long-term loans are suited to finance major investments such as real estate, large-scale expansion, or heavy machinery. They often require collateral and have lower interest rates.
Benefits of Term Loans
Structured Repayment: Know your exact monthly payment amounts and duration, which helps in budgeting and financial planning.
Fixed or Predictable Interest Rates: Many term loans offer fixed interest, protecting you from fluctuating market rates.
No Equity Dilution: As a debt product, term loans allow borrowing without giving up ownership in your business.
Tax Advantages: Interest paid on term loans is often tax-deductible, lowering your overall tax liability.
Flexible Usage: Term loans can fund a variety of business or personal needs, from expansion and asset purchase to working capital management.
Improved Credit Profile: Timely repayments of term loans build creditworthiness, easing access to future credit.
Frequently Asked Questions ?
What is the typical tenure for a term loan?
Term loans generally range from 12 months to 10 years, depending on the loan purpose and lender terms.
Are term loans secured or unsecured?
Term loans can be both secured (requiring collateral) or unsecured depending on loan size, tenure, and lender policies.
Can individuals avail term loans or are they only for businesses?
Both individuals and businesses can apply for term loans depending on their financing needs.
How are EMIs calculated for a term loan?
EMIs are calculated based on the principal loan amount, interest rate, and loan tenure, typically using the amortization formula.
What happens if I prepay or foreclose a term loan?
Prepayment or foreclosure may attract prepayment penalties depending on the lender’s terms, but it can reduce total interest cost.
Can term loans be used for working capital?
Yes, short and intermediate term loans are often used to manage working capital requirements.
Published on: July 23, 2025
Published by: PAVAN
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