A term loan is a simply a loan that is given for a fixed duration of time and must be repaid in regular installments. These loans usually extended for a longer duration of time which may range from 1 year to 10. Some term loans may last for more than 10 years. Usually, the tenure for a term loan is decided at the time of loan application by the lending institution or bank. Rate of interest charged under these loans may be on a fixed or floating basis, which will vary with market fluctuations. Term loans are mostly used as small business loans but can also be taken on an individual basis as well.
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.
- The loan has to be repaid within the fixed term regardless of the firm’s financial situation. 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.
- The term loan’s maturity lies between 5 -10 years. The repayment of the loan is made in installments. The tenure can be rescheduled to help borrowers deal with the financial emergencies. The lender will ask the borrower not to raise additional loans and to repay the existing loans and maintain a minimum asset base. Term loans can be converted into equity according to the terms and conditions that have been laid out by the lender. Financial institutions impose a penalty on the defaults. Commitment fee is charged on the unutilized loan amount.
- The principal loan amount is to be repaid after the initial grace period of 1 – 2 years. Commercial banks’ term loan is repayable in equal quarterly installments whereas financial institutions’ loan is repayable in equal semi-annual installments. Servicing burden of the loan declines over time. The interest will be less and the principal repayment will remain constant.
- Loans can be categorized based on their tenure into short-term loans and long-term loans. Term loans that are of a shorter duration, usually less than one year, are called short-term loans. Loan with duration of three or more years are classified as long-term.
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