What is a Term Loan or Meaning of Term Loan?

Short-term loans or long-term loans that are approved and sanctioned by financial institutes are known as term loans. You can resolve such a loan by paying for it in EMIs throughout your repayment tenure. The repayment tenure of such loans starts from 12 months and can extend up to 84 months. These types of loans are also usually offered at fixed and floating interest rates. Some examples of term loans are - education loans, personal loans, auto loans, home loans, gold loans, and business loans.

Types of Term Loans

Term loans depend on the requirement of the applicant. As a result, they are available in different types. Some of the common factors on which these loans are based are as follows:

  1. Principal Amount Required
  2. Repayment Capacity of the Applicant
  3. Flow of Income

Depending on the above-mentioned factors, financial institutes will fix the interest rates and also the loan terms. Terms loans are usually segregated into the following three types:

Short-Term Loans: As the name suggests, short-term loans have a repayment tenure of 12 to 18 months. These types of loans are ideal for those who need money to fulfill their immediate requirement and are willing to resolve the debt as soon as possible.

Intermediate-Term Loans or Mid-Term Loans: If you need a huge sum of money to finance your business or for other necessities, then you can opt for a mid-term loan. Such loans come with a repayment tenure of up to 84 months, so you can pay off your debt smoothly.

Long-Term Loans: Long-term loans offer convenient interest rates. They also offer a repayment tenure of up to 84 months. If you require a lump sum and you want to pay your borrowed amount in EMIs that are not excessively expensive, then you can opt for a long-term loan. Such loans also fall in the category of secured loans.

Term Loan Category

Term loans can be divided into two categories. They are explained below:

Secured Loan: If your term loan is a secured loan, then you will have to submit collateral security to your bank or NBFC. Your collateral security can be submitted in the form of residential or commercial properties, machinery, stocks, and raw materials.

Unsecured Loan: If your loan is an unsecured loan, then you will not have to submit any collateral or security to your bank or financial institute. The interest rates offered in such loans are usually higher as no collaterals are required.

Who can Apply for Term Loans?

Term loans can be applied by individuals who are in the following categories:

  • Salaried People
  • Self-employed Individuals
  • Small Business Owners
  • Traders
  • Artisans
  • Manufacturers
  • Retailers
  • Entrepreneurs
  • Micro Small and Medium Enterprises
  • Firms
  • Entrepreneurs
  • Micro Small and Medium Enterprises
  • Firms
  • Public Limited Companies
  • Private Limited Companies
  • LLPs
  • Cooperative societies,
  • NGOs
  • Trusts

How do Term Loans Work?

Check the explanation given below to understand how term loans work.

Principal Loan Amount: Term loans have a fixed loan amount. So, depending on the type of loan which you have selected, the loan amount will differ. The loan amount is determined once you satisfy the lender’s requirements.

Fixed Repayment Tenure: Term loans have a fixed repayment tenure. This tenure is specified when you avail of the loan. You must repay the loan amount in monthly EMIs during the repayment tenure. Also, as explained previously, term loans are called short-term, mid-term, or long-term as per the repayment tenure.

Secured/Unsecured Loans: As mentioned previously, term loans can be secured and unsecured. If your term loan is unsecured, you will not have to submit any collateral or security but you might have to pay a higher interest rate. If your loan is secured, then you will have to submit collateral to the lender.

Fixed or Floating Interest Rate: You can decide the type of interest that you want. You can opt for a fixed interest rate or a floating interest rate.

Fixed Repayment Schedule: All loans have a repayment schedule. You must pay your EMIs based on the repayment schedule.

Term Loan Eligibility Criteria

  1. You must fall in the age group of 18 years to 65 years
  2. A good repayment history and creditworthiness
  3. A high credit score of 700 and above
  4. A regular source of income
  5. No criminal records
  6. You must not be listed as a defaulter with any financial institute

Documents Required for Term Loans

The following are the documents that are required to apply for a term loan:

  1. Passport-size photo
  2. ID Proof
  3. Address Proof
  4. Age Proof
  5. Filled Application Form
  6. Income Proof
  7. Business Address Proof
  8. CIBIL report
  9. Bank Statement (last 12 months)
  10. Income Tax Returns, Sales Tax Reports, Profit and Loss Statement (Last 2 years)

Advantages and Disadvantages of Term Loans

Term loans can help you realize your goals. However, if not repaid or used carefully, it can negatively affect your financial situation. To make a sound decision before applying for one, you can check out the pros and cons of a term loan:

Pros

  1. Flexible repayment tenure
  2. High principal amount
  3. Affordable EMIs
  4. Quick Disbursal
  5. No security required for unsecured loans
  6. Quick approval

cons

  1. Business Address Proof
  2. CIBIL report
  3. Bank Statement (last 12 months)
  4. Income Tax Returns, Sales Tax Reports, Profit and Loss Statement (Last 2 years)