Looking for a structured way to finance your big expenses? Whether it is expanding your business, buying a home, or covering a major purchase, a term loan could be the perfect solution. With fixed repayment schedules and flexible tenures, term loans help you manage finances without the stress of a lump-sum payment.
What is a term loan?
A term loan is borrowed for a particular amount of time, often one to 10 years, but it can be longer. The borrower guarantees to repay the loan in regular instalments, including principal and interest.
These loans are mostly used for long-term financial planning and typically come with collateral requirements, which call for the borrower to put up an asset as security.
After receiving a lump sum payment, approved borrowers must repay the loan over a certain length of time, typically on a monthly or quarterly basis.
The interest rates on these loans may be fixed or variable. Depending on a borrower's creditworthiness, banks and other financial organisations offer term loans.
Term loans are popular among borrowers for a number of reasons, such as the ease of the application procedure, the upfront cash payment, the availability of specified payments and the lower interest rates.
Moneycontrol has teamed up with eight lenders to offer fast, fully digital loans up to Rs 50 lakhs. The application process is easy to follow: enter your details, complete the KYC verification and choose an EMI plan. Interest rates can start as low as 10.5% per annum, depending on your employment status.
Examples of term loans
Individuals as well as companies opt for term loans to pay for major expenditures like expanding their company or purchasing equipment or property.
For example, the company may take a term loan to open a new office, expand the existing business, or purchase advanced equipment. Individuals also take term loans to buy property, repaying it over 20–30 years, or to purchase a vehicle, repaying the amount over 3–7 years.
Term loans are suitable for students looking to cover their tuition fees. There is no urgency in repayment, as they can start repaying after completing their education.
Types of term loans
There are three types of term loans and can be classified based on their tenure and repayment structure.
1. Short-term loans
A short-term loan is a type of loan that must be repaid within a short period, less than a year. Some lenders can give the repayment tenure of loans up to 18 months. These loans help businesses and individuals meet immediate financial needs. This is the reason these loans are approved faster than long-term loans.
Since the repayment period is shorter, the interest rates are often higher on short-term loans.
Examples of short-term loans are working capital loans, trade credit, invoice financing, payday loans, and medical bills.
2. Mid-term loans
A medium-term loan has a repayment period ranging from one to five years. The borrower repays the loan in fixed EMIs over a few years. The interest rate is lower than short-term loans but higher than long-term loans.
These loans are ideal for businesses and individuals who need funds for expansion, equipment purchases, or personal needs but do not want long-term financial commitments.
For example, a restaurant owner may take a four-year loan of Rs 20 lakhs to open a new outlet, or a factory owner may buy new equipment worth Rs 10 lakh and take an EMI of 4 years. Other examples also include vehicle loans, education loans, and personal loans like weddings or home renovations.
3. Long-term loans
A long-term loan is a loan that has a repayment period of more than five years, often extending up to 30 years. They come with lower interest rates compared to short-term and mid-term loans, but the borrower must commit to repayments for a long period.
Long-term loans provide high funding, making them ideal for big investments. Lenders check credit history, income stability and repayment capacity before approval.
These loans are mainly used for large investments like buying property, constructing buildings, or business expansion.
Moneycontrol has partnered with seven lenders to provide you with quick, 100% digital loans up to Rs 50 lakhs. You can get the loan in three steps: enter your information, complete the KYC process and set up an EMI term. Depending on your work status, interest rates can start as low as 10.5% annually.
Features of term loans
1. Fixed loan periodTerm loans come with a set payback time that might be short-term (less than a year), medium-term (one to five years), or long-term (more than five years).
2. Repayment in EMIs
Borrowers repay their loans in Equated Monthly Installments (EMIs), which contain both the principal and interest. Borrowers can repay in monthly, quarterly and half-yearly installments. This facilitates financial planning.
3. Interest rate
There are two types of interest rates: fixed or floating. In fixed, the interest rate remains constant throughout the loan tenure, while in floating, the interest rate varies based on market conditions.
Conclusion
To sum up, term loans serve as a reliable financing option for both individuals and businesses, helping them manage expenses related to expansion, asset purchases, or personal investments.
Disclaimer
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