A term loan is a lending agreement in which a borrower advances a sum of money at one time and pays it back within a set time period through periodic payments. A common financial instrument for individuals and companies to finance different needs ranging from starting a business to financing unforeseen personal expenses.
In this article, we’ll explain the term loan meaning, its different types (including short term loans and long term loans), features, interest rates, and even tools like a term loan calculator. We’ll also include real-world term loan examples to make the concept clearer.
What Is the Meaning of a Term Loan?
The definition of a term loan is straightforward: it's a loan that's repaid over an agreed term or period, commonly in monthly installments. It may be unsecured or secured and is frequently used for specific purposes such as equipment acquisition, home improvement, or business growth.
Types of Term Loans
Term loans are commonly classified according to their term:
1. Short Term Loans
Term: Less than 1 year (occasionally up to 3 years)
Suited for: Financing immediate short term loan requirements such as cash flow shortfall, sudden medical bills, or SME requirements.
Typical platforms: Short term loans online are now readily available on websites and applications.
Availability: Short term loans in India have increased in popularity due to digital platforms.
2. Medium Term Loans
Medium of 1 to 5 years
Suited for: Funding purchase of vehicle, wedding costs, or working capital for SMEs.
3. Long Term Loans
Duration: Over 5 years
Suitable for: Purchasing a house, business growth, or significant capital outlay.
Characteristics of Term Loans
A few of the primary characteristics of a term loan are:
- Fixed Repayment Schedule: Monthly or quarterly payments.
- Interest Rate Options: Term loans can be either fixed or floating term loan interest rates.
- Loan Amount: The loan amount varies based on the creditworthiness of the borrower and the purpose.
- Collateral Requirement: Certain term loans (particularly long-term) could be secured.
- Flexible Tenure: Select short, medium, or long-term repayment periods.
- Availability of Online Tools: Apply a term loan calculator to calculate EMIs, interest, and repayment timeline.
Term Loan Example
Suppose a company avails a ₹5,00,000 term loan for 3 years bearing an interest rate of 12% annually. They will pay back the loan via EMIs. A term loan calculator may be used to calculate the monthly installment, total interest paid, and cost of loan.
Advantages of Term Loans
1. Easy access to money
2. Flexible use – business or personal
3. Adjustable loan period
4. Less interest compared to credit cards or payday loans
5. Quick approval for instant short term loan by online lenders
Term Loan Interest Rate
Term Loan interest rate varies based on a number of factors:
1. Loan type (secured/unsecured)
2. Creditworthiness of the borrower
3. Policy of the lender
4. Tenor of the loan
5. Borrower's income or business income
6. Online websites that provide short term loan in India
Conclusion
A term loan is an all-purpose financial instrument appropriate for both short and long-term purposes. Whether an emergency online short term loan or a long term loan for business expansion, knowing the term loan definition, its categories, interest, and repayment period will enable you to make an intelligent borrowing choice. Always compare rates and utilize a term loan calculator prior to applying.
Short-term and long-term loans are generally used for very different reasons.
Short-term loans typically have a repayment period of one month or less.
Long-term loans come with longer repayment terms.
An interim category called installment loans offers loan amounts and terms that fit between the other options.
Banks, credit cards, and friends and family may offer you better loan terms, so you should check these options before requesting an online payday loan.Read more:Short Term Vs. Long Term Loan: Which One Is Better?
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A short term loan is one that is taken out to meet a short-term personal or business capital requirement.
Because it is a form of credit, it entails repaying the principal amount plus interest by a specified due date, which is normally one year after the loan is obtained.
A short-term loan is an excellent choice for small enterprises or start-ups that do not yet qualify for a bank credit line.
The loan involves smaller amounts of money borrowed, ranging from $100 to $100,000.
It must be paid off within six to a year – at most, 18 months – in most situations.
Long-term loans can run anything from a few months to 25 years.
