Term Loan

Key Highlights

• A Term Loan is a type of loan provided by banks or financial institutions for a specific amount, with a fixed repayment schedule and an agreed interest rate.

• Types of term loans in India include short-term, medium-term and long-term loans.

What is Term Loan?

A Term Loan is a type of loan provided by banks or financial institutions for a specific amount, with a fixed repayment schedule and an agreed interest rate. In India, term loans are typically used by businesses and individuals to finance long-term projects, capital expenditures, or large purchases, such as machinery, property, or infrastructure.

Key Features of Term Loans

1. Fixed Tenure: The loan is offered for a specific period, usually ranging from 1 to 10 years, depending on the loan agreement.

2. Repayment Schedule: Borrowers repay the loan in regular installments (monthly, quarterly, or annually) over the agreed tenure.

3. Interest Rate: The interest may be either fixed or floating, depending on the terms of the loan.

4. Secured or Unsecured: In many cases, term loans are secured by collateral (such as property or equipment). Unsecured term loans may also be offered but often come with higher interest rates.

Types of Term Loans in India

1. Short-Term Loan: Usually, a loan with a tenure of less than one year, typically used for working capital requirements.

2. Medium-Term Loan: Loans with a repayment period ranging from 1 to 5 years, often used for business expansion or capital investment.

3. Long-Term Loan: Loans with tenures exceeding 5 years, generally used for major investments like real estate purchases or infrastructure development.

Advantages of Term Loans

• Structured Repayments: Provides predictability as repayments are structured over a specific period.

• Lower Interest Rates: Secured term loans often come with lower interest rates compared to other forms of credit like credit cards or overdraft facilities.

• Capital Growth: Term loans help businesses invest in long-term growth without immediate financial strain.

Disadvantages of Term Loans

• Collateral Requirement: For secured loans, borrowers must pledge assets, which can be risky if they fail to repay.

• Interest Costs: The overall cost of borrowing can be significant, especially for long-term loans, as interest accumulates over the years.

Common Uses of Term Loans in India

1. Business Expansion: Companies frequently use term loans for growth-related projects, such as opening new locations or upgrading equipment.

2. Purchase of Assets: Individuals and businesses use term loans to buy vehicles, property, or machinery.

3. Project Financing: Infrastructure and development projects often rely on long-term loans to cover initial costs, with repayment spread over several years.

Eligibility Criteria

Lenders assess several factors before approving a term loan in India, including:

• Creditworthiness: Credit score and financial history.

• Income or Revenue: The borrower's ability to repay, based on income or business revenue.

• Collateral: For secured loans, the value of the assets offered as security.