Term Loan - Meaning, Examples, Types & Features

Types of Term Loans 

Term loans encompass various types, typically categorized based on their duration and repayment terms. These include: 

1. Short-term loans: Typically granted to businesses that do not qualify for a line of credit, these loans typically have a duration of less than a year, although they may extend up to 18 months. 
2. Intermediate-term loans: These loans typically span one to three years and are repaid through monthly installments derived from the company's cash flow. 
3. Long-term loans: Spanning from three to 25 years, these loans utilize company assets as collateral and necessitate monthly or quarterly payments sourced from profits or cash flow. Long-term loans impose restrictions on additional financial commitments such as other debts, dividends, or executive salaries and may require a portion of profits to be earmarked specifically for loan repayment. 

Both short- and intermediate-term loans may also be structured as balloon loans, featuring balloon payments. In such cases, the final installment balloons into a significantly larger amount compared to previous payments.

How to Apply for a Term Loan

Assess Your Needs & Research Lenders:

Clearly define the purpose of the term loan. Whether it's for business expansion, equipment purchase, or personal reasons, understanding your financial requirements is the first step. Explore various financial institutions, banks, or online lenders offering term loans. Compare interest rates, terms, and eligibility criteria to identify the most suitable options.

Check Eligibility Criteria & Gather Required Documents:

Review the eligibility requirements set by potential lenders. Common criteria include a good credit score, stable income, and a positive financial history. Prepare the necessary documentation, which may include proof of identity, income statements, bank statements, business financials (for business loans), and any other documents specified by the lender.

Fill Out the Application Form:

Complete the application form with accurate and up-to-date information. Provide details about the purpose of the loan, desired amount, and relevant personal or business details.

Review Loan Terms:

Once the application is submitted, wait for the lender's response. This may take some time as they evaluate your financial standing and creditworthiness. If approved, carefully review the loan terms and conditions, including interest rates, repayment schedule, and any associated fees.

Read more about Personal Loan

Features of Term Loan

The features of term loans are as follows:

1. Term loans are Secured Loans. The asset that is purchased using the term loan amount, will serve as a primary security and other assets of the company will be serving as collateral security.
2. The loan must be repaid within the fixed term regardless of the firm’s financial situation.
3. The interest rate on the loan is charged after evaluating the credit risk of the proposal, the loan amount and tenure for which the loan is taken. The interest rate will be subject to a minimum lending rate. The rate is negotiated between borrowers and lenders at the time of distributing the loan.
4. The term loan’s maturity lies between 5 -10 years. The repayment of the loan is made in instalments. The tenure can be rescheduled to help borrowers deal with the financial emergencies.
5. The lender will ask the borrower not to raise additional loans and to repay the existing loans and maintain a minimum asset base.
6. Term loans can be converted into equity according to the terms and conditions that have been laid out by the lender.
7. Financial institutions impose a penalty on the defaults.
8. Commitment fee is charged on the unutilized loan amount.
9. The principal loan amount is to be repaid after the initial grace period of 1 – 2 years.
10. Commercial banks’ term loan are repayable in equal quarterly instalments whereas financial institutions’ term loan are repayable in equal semi-annual instalments.
11. Servicing burden of the loan declines over time. The interest will be less and the principal repayment will remain constant.

Advantages of Term Loans

1. The loan is cheap for the borrower.
2. The interest that the borrower pays on the term loan is tax deductible and hence can avail tax benefit on the interest paid.
3. The term loans are negotiable and hence the terms and conditions of the loan are not rigid.
4. The term loans represent debt financing and the interest of the equity shareholder is not weakened.
5. The lender will have a collateral security and hence the loan is not a huge risk to the financial institution.
6. Since the borrower will be making regular payments towards the principal loan amount and interest, the lender will have a regular and steady income.
7. Since the loan can be converted to equity, the lender can get the right to control the affairs of the business or firm.

Top Banks Offering Term Loans in India

Following are some of the lenders that offer Term loans in India:

Applying for a term loan involves a systematic process to ensure a smooth and successful application. Here's a step-by-step guide to help you navigate through the application procedure:

Factors Influencing Term Loan Approval

When applying for a term loan, various factors come into play that lenders consider to assess the borrower's creditworthiness and determine loan approval. Understanding these key factors can help applicants improve their chances of securing approval. Here are the primary elements that influence term loan approval:

Credit Score:

1. A borrower's credit score is a crucial factor. Lenders use this numerical representation of creditworthiness to evaluate the individual's past credit behavior. Higher credit scores often lead to more favorable loan terms and increased chances of approval.

Income and Employment Stability:

1. Lenders assess the borrower's income level and employment history to gauge financial stability. A consistent income and a stable employment record demonstrate the ability to repay the loan.

Debt-to-Income Ratio (DTI):

1. The DTI ratio compares a borrower's total monthly debt payments to their gross monthly income. Lenders prefer a lower DTI, as it indicates that the borrower has sufficient income to cover existing debts and the proposed loan.

Purpose of the Loan:

1. Clearly stating the purpose of the loan is essential. Lenders may be more inclined to approve a loan when the funds are allocated for a specific, well-defined purpose, such as business expansion, equipment purchase, or debt consolidation.

Collateral (Secured Loans):

1. Secured term loans require collateral, such as property or assets. The quality and value of the collateral can influence approval, as it serves as a form of security for the lender.

Loan-to-Value Ratio (LTV):

1. For secured loans, the LTV ratio compares the loan amount requested to the appraised value of the collateral. A lower LTV ratio may enhance the likelihood of approval.

A good credit score can help you secure lower interest rates on loans and credit cards.

Get Free Credit Score