Term Loans Explained: Types, Benefits, And Eligibility

Term Loans Explained: Types, Benefits, and Eligibility

Definition

A term loan is granted for a specific period that typically extends to 96 months and has to be paid in installments (EMIs). Term loans are offered to businesses for a variety of purposes, like expansion and capital expenditure. They have a variable interest rate based on market conditions.

Small-scale enterprises with solid financials, as well as individuals, can benefit from these loans. One of the main benefits of these loans is the quick payment of funds, minimal documentation requirements, and flexible repayment options.

Classification of Term Loans

Short-term, intermediate-term, and long-term loans comprise the three major kinds that are offered as term loans. Term loans are provided to help borrower meet their cash requirements based on the following factors:

Needed financial resources
The borrower’s ability to pay back
Regular cash flow or readily available cash-on-hand

These factors determine how the interest rates for term loans alter with other loan terms. These changes are of the following forms:

Short-term Loans

When faced with cash-flow issues, individuals or businesses who urgently require cash usually take this business loan for short periods. They are issued for a time period of between 12 to 18 months. Some lenders offer business loans with terms of up to 8 years or 96 months in short-term loans

Mid-term Loans

As these loans can be repaid over an extended period of up to 96 months, financial institutions typically categorize them as mid or intermediate-term loans. They are usually used to fund companies’ more extensive budget needs, such as the purchase of equipment or the increase of working capital.

Long-term Loans

These loans are usually used to invest in certain businesses, buy real estate, and so on. To get this type of loan, it is crucial to secure collateral, but it is only available for safe investments. Long-term loans have more time to pay and are provided with competitive interest rates. These loans can be repaid over a longer time frame using the easy EMI option, which meets the requirement for a lump sum of funding for a company.

How Do Term Loans Function?

Among the various financing options available, term loans are one of the simplest to utilize since they come with a predetermined loan amount and rates, like EMIs. To get a basic understanding of how a term loan works, take a look at the following explanation:

Set Loan Amount: Term loans have a predetermined amount. The value of loans can vary depending on the kind chosen. Lender eligibility criteria must be satisfied to determine the amount of the loan.
Fixed Repayment Term: The money borrowed through EMIs must be paid back in the fixed timeframe that was agreed upon at the time the loan was sought. It’s classified as a mid-short or long-term loan based on the duration of repayment. Each term loan comes with an agreed-upon repayment schedule, and the borrower must pay EMIs according to the schedule. The EMI allows the borrower to pay off loans quickly because it comprises principal and interest components that are calculated according to the current interest rates for term loans. Before submitting an application for a loan, you are able to determine the EMI by using an online calculator.
The need for Collateral May or May Not Be There. Loans can be secured or unsecured, depending on the amount, the borrower’s eligibility, and the borrower’s needs. Unsecured term loans are available for business, personal, and other uses.
Floating or Fixed Interest Rates: Term loans have adjustable and fixed interest rates. The lender determines which type of interest to charge.

EMI Calculation

An Equated Monthly Installment (EMI) is a fixed monthly payment made by an individual borrower to a lender on a set day each month. Making monthly principal and/or interest payments over a period of years enables the borrower to pay back the loan in full. EMI debtors are typically permitted to make one fixed monthly payment.

The borrower benefits from EMIs, as they can better organize their finances since they know precisely how much they’ll have to pay each month to repay their loan. The lenders benefit from the interest on loans since they provide a stable and consistent stream of revenue. This is a distinctive feature that distinguishes term loans.

Advantages of a Term Loan

The majority of people borrow term loans due to their numerous benefits. Due to the high competition in the market, banks and NBFCs provide term loans with favorable interest rates. If you have a good credit history, you may be able to negotiate a lower interest rate than what they advertise in their brochures and websites.

Your odds of obtaining lower interest rates will increase if you possess an excellent credit score. In general, when interest rates are high, it is advisable to choose variable rates. This way, you could benefit from a potential reduction over time. A fixed interest rate is an excellent option for loans with a short duration. Term loans can also help in increasing a company’s cash flow.

They reduce the financial burden companies have to maintain their operations. Additionally, based on the market cycle, you can choose the type of interest rate. The main advantages of these loans are quick payment of funds, minimal documentation requirements, and flexible repayment choices.

Eligibility Requirements

A term loan’s eligibility is dependent on many factors, which include:

Nationality: Indian
Age: 24-70 years old
CIBIL Score: Excellent (typically higher than 685)
Business Ownership: Required

Term loans are based on the borrower’s credit history, the number of projects completed, and the borrower’s history. They also depend on the lender’s business plan. The lender has to be convinced that the idea is feasible and can earn substantial sums of money. The type of mortgage utilized as collateral is another crucial aspect. When making a loan for a term to a company, its reputation, credibility, financial standing, and operational efficiency are taken into account.

Documents Required

If you meet all the criteria for eligibility, you will need several documents to complete the application process:

KYC documents, such as an Aadhaar, PAN card, passport, utility bills (electricity, telephone, or water), or a voter ID (identity address, identification, and proof of age)
Proof of your status as the proprietor of the business
Financial records of the business
A properly completed application form, along with two passport-sized pictures
Bank statements for the last year
Minimum turnover as established by the lender or bank
Other documents the lender or bank may require

Conclusion

Term loans are an essential financial instrument for both individuals and companies looking to meet their specific requirements for funding in the short term. Their pre-planned payment plans and flexible repayment terms make them a viable option for managing cash flow and financing expansion. With attractive interest rates, they are ideal for making substantial investments.

Understanding the different types of term loans—short-term, mid-term, and long-term—can help customers choose based on their financial needs and goals. Borrowers can access funds quickly and efficiently when they meet eligibility requirements and provide the necessary documents.

As with all financial decisions, it’s crucial to analyze your needs, explore various loan options, and consult financial advisers. This will help you make informed choices that align with your financial objectives.

If you’re a small-scale company owner or a person with a significant idea in mind, term loans could offer the assistance you need to reach your goals.