Sometimes savings are not enough. You may need a large amount of money to expand a business, purchase equipment, or cover personal needs like education, medical treatment, or home renovation. This is where a Term loan comes in. This type of loan is one of the most widely used financial products offered by banks and financial institutions. It is simple, predictable, and structured. Know how it works, and why people choose it.
This type of loan is one of the most widely used financial products offered by banks and financial institutions. It is simple, predictable, and structured. Know how it works, and why people choose it.
A term loan is a fixed sum of money obtained for a specific purpose. The repayment happens in installments, usually monthly, over a defined tenure. The lender informs you at the start about the repayment schedule and the interest rate, which may be fixed or floating.
For instance, if you borrow ₹10 lakhs for five years, the bank will confirm the EMI amount and tenure upfront before releasing the funds.
Main features of a Term Loan:
- You receive the full loan amount at once.
- Repayment is structured in EMIs over time.
- The interest rate may be fixed or variable.
- Â The length of time can be from a few months up to several years.
This makes a term loan very different from flexible facilities such as Cash Credit or Overdraft.
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Which Is More Useful – A Term Loan or A Personal Loan?
A Personal Loan is really a kind of loan, typically unsecured and for personal use. A general loan period can either be secured with collateral or not. When is each convenient?
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If you’re in urgent need of funds for personal purposes such as travel, study, or emergencies, a short term personal loan is convenient. It is handled quicker and typically does not need security.
If you are an entrepreneur looking to purchase machinery, increase your factory’s size, or fund infrastructure, a longer tenure and greater amount term loan is the best option
In a nutshell, opt for a personal loan for smaller, urgent needs and a term loan for greater, planned financial outlays.
Who Can Apply for a Term Loan?
The eligibility for a term loan is wide:
- Salaried individuals who require funds for personal use.
- Self-employed professionals like doctors, lawyers, or consultants.
- Companies requiring working capital, equipment finance, or expansion funding.
- Banks and financial institutions consider applications on the basis of credit history, repayment ability, stability of income, and in some instances, collateral.
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Is it a good thing to take a Term Loan or not?
Yes, in case you have a specific purpose and can repay, a loan term is typically a good option.
Advantages include:
- Availability of a lump sum amount all at once.
- Pre-determined repayment schedule for financial certainty.
- Enhanced credit score through regular EMI repayment.
- For companies, potential tax relief on interest outgo.
Hazards are:
- Non-payment of EMIs can result in penalties and credit score loss.
- In the event of default, secured loans may put your collateral at risk.
- Prepayment charges may be applicable in case you wish to repay the loan in advance.
Any loan is good if you borrow in your limits and repay accordingly. Now you would be thinking that can you show me an example of a term loan? So here it is:
Suppose a small entrepreneur Anil requires ₹25 lakhs to buy machinery. His bank sanctions a seven-year loan term at 10 percent interest. The bank pays ₹25 lakhs to him. His monthly EMI is approximately ₹41,500. After seven years, the loan is repaid in full.
This is how one avails a term loan: you receive money at the beginning, repay in fixed installments, and complete the commitment towards the end of tenure. For personal finance, consider taking ₹2 lakhs as a short personal loan for medical treatment. The bank provides the repayment schedule of two years. You pay EMIs for two years, and the loan gets repaid.
Features of a Term Loan
When you take a term loan, these are the primary features that you can get:
- Lump sum disbursal: The entire amount of the loan is provided upfront.
- Fixed repayment schedule: EMIs are arranged monthly or quarterly until loan repayment.
- Defined tenure: How long you take to repay the loan depends on the type of loan, and it can be for a few months up to several years.Â
- Interest structure: The interest rate can either remain the same for the whole time you’re repaying the loan or it can change depending on what’s happening in the market.
- Collateral requirement: Based on the type of loan, it can be secured (on assets) or unsecured.
Advantages of a Term Loan
some of the reasons why most people and companies opt for a term loan:
- Clarity: Both repayment and amount are well specified.
- Predictability: EMIs are certain and are simple to budget for.
- Reduced rates: When compared to credit cards, secured loans typically have lower interest rates.
- Larger borrowing limits: Larger amounts are provided as opposed to personal credit lines.
- Flexible repayment options: Tenures could be short-term or long-term as needed
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Conclusion
A term loan is a trusted and dependable source for borrowing money. If you are an individual borrowing a short term personal loan or a business person looking to undertake an expansion, this kind of loan provides form, predictability, and transparency.
The secret to wisely using a term loan lies in discipline. Lend only what you can easily pay back, read the terms correctly, and adhere to your payment schedule. Used correctly, it will enable you to reach personal achievements and professional milestones without undue financial strain.
