Term Loans – Benefits and Eligibility
What is Loan in Simple Words?
A loan is an agreement where a lender provides money to a borrower, who repays it with interest over time. The repayment is usually done in installments. Loans are categorised into secured loans, backed by collaterals, and unsecured loans, which do not need security.
What is a Term Loan?
Term loan meaning can be defined as a loan that is granted for a set period, typically up to 96 months and must be repaid in regular instalments (EMIs). Term loans are provided to firms for various purposes, including expansion and capital expenditure. These loans have a variable interest rate that is determined by the state of the market. Small enterprises with strong financials or individuals both take these loans. Some key advantages of these loans are speedy money disbursal, minimal documentation requirements, and flexible repayment options.
Features of Term Loan
The following are the essential term loan features:
Reduced Servicing Burden: Over time, interest rate payments decrease while the principal repayment amount remains constant. This reduces the loan’s financial burden.
Secured Loan: Term loans are secured, with the purchased asset acting as primary security and the other company assets serving as collateral security. This ensures the lender’s risk is minimised.
Fixed Tenure: The loan must be repaid within a specific period, regardless of the borrower’s financial situation. It offers a structured repayment schedule.
Interest Rates: The interest rate is determined based on credit risk, loan amount, and tenure. It is negotiated between the borrower and the lender within a minimum lending rate framework.
Installments: Repayment schedules vary; commercial banks require equal quarterly installments, while financial institutions prefer semi-annual installments.
Penalties for Defaults: Financial institutions impose penalties for defaults to ensure timely repayment and compliance with the terms.
Borrowing Restrictions: Borrowers are often restricted from taking additional loans and must maintain a minimum asset base as per the agreed terms.
Commitment Fee: A fee is charged on the unused portion of the loan amount. It incentivises borrowers to utilise the approved funds effectively.
Maturity Period: Typically spanning around 5 to 10 years, the loan is repaid in installments, with rescheduling options available during financial difficulties.
Grace Period: Borrowers are provided an initial grace period of 1 to 2 years before the principal repayment begins. This offers financial relief.
Types of Term Loans
Short-term, intermediate-term, and long-term term loans are the three main categories of term loans. Term loans are offered to meet a borrower’s cash needs, considering the following:
- Required financial resources
- The capacity of the borrower to repay
- Regular cash flow and cash on hand are both available
They determine how term loan interest rates change along with other lending terms. These developments come in the following varieties:
Short-term Loans
Short term loans meaning can be defined as loans that are taken by borrowers when facing unforeseen cash problems or consolidating loans urgently needing cash. It is issued for a period between 12 and 18 months. However, some lenders also provide loans with terms of up to 8 years, or 96 months, as short-term loans.
Mid-term Loans
Since these loans have a longer period of up to 96 months, financial institutions typically define them as intermediate or mid-term loans. These loans are typically taken to meet the large-budget funding requirements of firms, such as the purchase of machinery, an increase in working capital, etc.
Long-term Loans
Long term loan definition means that they are typically taken for investing in certain enterprises, buying real estate, etc. For taking this loan, it is important to provide collateral, although it is only offered for safer investments. Long-term loans have a longer period and are offered at competitive term loan interest rates. These advances can be easily repaid over a lengthy period with the simple EMI option, satisfying the need for lump-sum funding of a business.
How Do Term Loans Function?
Among the many financing choices accessible, term loans are one of the easiest to use because they include pre-set loan amounts and interest rates, such as EMIs. For a simple grasp of how a term loan operates, let’s look at the explanation below:
- Set Loan Amount
Term loans include a predetermined amount. Loan values can change depending on the type of term loan selected. The lender’s eligibility requirements must be met to determine the loan amount.
- Fixed Repayment Term
The amount borrowed in EMIs must be repaid over the specified fixed tenor, as agreed upon when the loan was requested. It is categorized as a short, mid, or long-term loan depending on the repayment length. Every term loan has a repayment plan, and the borrower is required to pay EMIs in accordance with that schedule. The EMI allows the borrower to make quick payments because it includes principal and interest components computed in accordance with the term loan interest rates in effect. Before applying for the loan, you can calculate the EMI using an online calculator.
- Need For Collateral May or May Not Be There
Depending on the required loan amount, the borrower’s eligibility, and their preferences, term loans might be secured or unsecured. While unsecured term loans, such as those for personal use, businesses, etc.
- Floating Or Fixed Interest Rates
There are fixed and adjustable interest rate options for term loans. Which form of interest to choose is entirely up to the borrower.
How Does the Term Loan Process Work?
The process of obtaining such a loan is straightforward, comprising of the following steps:
- Fill Out the Application Form: Borrowers need to complete an application form detailing their financial projections, creditworthiness, and business plans. This helps lenders evaluate the borrower’s eligibility and assess the purpose of the funds.
- Lender’s Review: After submission, the lender thoroughly reviews the application. They often request additional documents or collateral. This ensures compliance with the loan and eligibility criteria.
- Loan Approval, Disbursement, and Repayment: Once approved, the funds are disbursed for use as intended. Borrowers repay the loan in regular installments, which include both principal and interest.
EMI calculation
An equated monthly instalment is a fixed payment made by a borrower to a creditor on a fixed day each month (EMI). Making monthly principal and interest payments over a number of years allows the loan to be returned in full. EMI debtors often are only allowed to make one fixed payment per month. Borrowers benefit from EMIs. After all, they can more easily organize their finances because they know exactly how much they will pay each month for their loan. Lenders profit from loan interest because it provides a steady and constant source of income. This is the distinguishing feature of term loans.
Advantages of a Term Loan
Borrowers are drawn to term loans because of their numerous advantages. Due to the intense competition in the industry, banks and NBFCs offer term loans at favorable interest rates. If you have a decent credit score, you can bargain for a lower interest rate in addition to what lenders advertise in their brochures or websites. Your chances of obtaining a cheaper interest rate increase if you have a strong credit score. Typically, when interest rates are higher, it is wise to select variable interest rates. In this manner, you might gain over time while planning for a potential rate reduction. A set rate of interest is ideal for short-term loans. Term loans also aid in boosting a company’s cash flow. It lessens the financial strain that enterprises must bear to maintain themselves. Also, depending on the market cycle, you can select the sort of interest rate. Some key advantages of these loans are speedy money disbursal, minimal documentation requirements, and flexible repayment options.
Eligibility Requirements
Qualifying for a term loan depends on several variables, to list a few:
- Nationality: Indian
- Age: 24 to 70 years old
- Good CIBIL score (typically more than 685)
- Business ownership needed
Term loans are based on the borrower’s credit history, number of completed projects, and borrower’s background. It also depends on the lender’s business model. The lender must be persuaded that the concept is viable and has the potential to bring in sizable sums of money. The type of mortgage being used as collateral is another crucial factor. When granting a term loan to a firm, the reputation of the enterprise, its financial standing, and its operational efficiency are all taken into consideration.
Documents needed:
If you satisfy all the requirements for qualifying, you will require several documents to finish the application procedure.
- KYC documentation, including an Aadhaar, PAN card, passport, utility bills (electricity, telephone, or water), or voter ID (identity, address, and age proofs);
- Proof that you are the business owner;
- Financial records of business
- Properly completed application form and two passport-sized photos
- Bank statement for the past year
- Minimal turnover determined by the bank or lender
- Any further paperwork that the bank or lender may require
Factors Influencing Term Loan Approval
You need to abide by the following factors in order to qualify for a term loan:
- Credit Score: A high credit score reflects strong creditworthiness and significantly enhances the likelihood of loan approval.
- Business Plan: A detailed and strategic business plan that explains the loan’s purpose and projected outcomes increases approval chances.
- Financial Statements: Stable revenue and profitability demonstrated in financial statements assure lenders of the borrower’s repayment ability.
- Collateral: Offering valuable assets as security strengthens the application by reducing the lender’s risk.
- Debt-to-Equity Ratio: A balanced ratio reflects a healthy financial structure, increasing lender confidence.
- Repayment Capacity: Sufficient cash flow and realistic income projections showcase the borrower’s ability to repay the loan.
- Industry Risk: Lenders evaluate the risks associated with the borrower’s industry to determine its stability and potential for repayment.
How to Apply for a Term Loan?
To apply for a term loan, you need to follow the following steps:
- Assess Your Needs and Research Lenders: Begin by identifying why you need the loan. It can be for business expansion, equipment purchases, or personal finance goals. Research lenders, and compare the interest rates, and repayment options to find the best fit.
- Check Eligibility and Prepare Documents: Ensure you meet the lender’s eligibility criteria, such as a strong credit score and a stable income. Collect all the required documents, including identity proof, income statements, bank records, and, for businesses, financial reports and plans.
- Submit the Application Form: Accurately fill out the application form, specifying the loan purpose, the desired amount, and your personal or business details. This step ensures transparency and speeds up the review process.
- Review and Agree to Loan Terms: Once your application is approved, carefully evaluate the loan terms and conditions, including the interest rate, repayment tenure, and any applicable fees. Accept the terms only if they align with your financial capabilities and goals.
Conclusion
Term loans offer businesses a reliable means to secure funding for your goals, with benefits such as fixed repayment and flexible interest rates. They are ideal for capital-intensive needs and strategic growth plans. Lendingkart simplifies this process by providing customized loan solutions tailored to your business requirements.
Term Loans FAQs:
1. Give classifications of term loans
2. Name some advantages of term loans?
3. Is a term loan considered a secure loan or an unsecured loan?
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