In reply to what is term loan, the most basic response would be that it is a viable financial solution for an individual or a commercial entity wanting to expand their asset base. Availing of a term loan entails borrowing a financial package from the lender for a specific duration and in lieu of a predetermined rate of interest. Usually the time-frame ranges between one and ten years, but it can be extended if the lender is sufficiently convinced. Likewise, the onus is on the borrower to adhere to the terms and conditions which the lender attaches to this loan.
A term loan could be short-term, intermediate or long-term, depending on when it is set to mature. While a short-term loan matures within one year, an intermediate loan takes up to five years and the duration for a long-term loan extends up to 10 years. Before applying, you must use a term loan calculator to check which type you are eligible for, so as to ensure ease of repayment and minimize chances of default.
Reasons why you should consider a term loan
Having grasped what is term loan, the next step entails exploring reasons as to why you should avail this loan –
Low rate of interest – Every loan has a rate of interest attached to it, and term loan is no exception to this rule. However, this financial solution varies a bit from its counterparts in the sense that the rate of interest can be lowered if the duration of the loan is longer. That being said, lenders keep the interest rate fixed throughout the term of the loan, meaning it is immune to fluctuations caused by volatile market conditions.
Flexible – Once you have determined the eligibility through the term loan calculator, it is time to negotiate the terms and conditions with the employer. Unlike some loan packages, term loans can be tweaked to suit the borrower in terms of interest rate, duration of repayment, principal amount and so on.
Swift approval – At the most, lenders take a day or two days to approve a term loan, which works out well for the borrower. Since this holds true for both short-term and long-term loans, these are relatively quicker funding options as compared to other financial solutions.
Ensures cash-flow – Regardless of the reason as to why you might have availed of a term loan, it does offer the convenience of ensuring free cash-flow into and out of the business. Purpose of the term loan could range from employee onboarding to repair, maintenance, expansion and upgrading, all of which require an initial investment before generating returns.
Shareholder equity unchanged – A term loan is one of the few financial solutions that does not have any negative impact on shareholder equity. So, you can use this loan to repay the debt without having to compromise on authority or control of the organization.
Easy to repay – While lenders specify a tenure for repayment of the loan, this can be extended or shortened as per the request of the borrower. Not only does this flexible timeline render the loan more affordable, but also enables the borrower to equip and improve the venture.
Final words
Term loans taken over a short duration could belong to categories such as personal, demand, consumer and so on, while term loans that stretch over a long duration could take the form of education loan, car loan, home loan and so on. From the lender’s perspective, factors that govern these loans are credit score, income, employment status and previous borrowing history. On their part, borrowers can use the term loan calculator to figure out the amount, duration and interest rate, and accordingly submit an application.
Ultimately, comprehending what is term loan is crucial towards deciding the type of loan you wish to avail and the conditions that accompany this convenient financial solution.
