How would you define a Term Loan?

Posted on 28 November 2009

A monetary loan that has to be repaid in regular payments over a set period of time is referred to as a term loan. Usually the term loans last between one and ten years, but there are such term loans also that may last as long as 30 years. An unfixed interest rate is usually involved in a term loan that will add additional balance to be repaid.


Who can have a Term Loan?

Individuals can also have a term loan but they are usually used for small business loans. It is an attractive loan for new or expanding enterprises, as they have huge time to repay the loan amount and it is assumed that they will increase their profit over time.

For raising a business’ supply capabilities or range, term loans are a good way of increasing capital in a short span of time. For example, term loan might be used by some new companies for the purpose of buying company vehicles or rent more space for their operations.

Some Students Loans are also Term Loans

There are some student loans that are also term loans. In the United States, the Stafford Loan is the name given to a loan that is usually offered to college students as a means of paying tuition and living expenses. This loan can be very beneficial to students.

Part of the loan may be subsidized, it is done so that interest does not accrue while the student remains in school. A six month grace period following graduation is also given to students before beginning repayments.

Fixed or Floating Interest rate

One thing that one has to be taken into consideration when getting a term loan is that whether the interest rate is fixed or floating.

Floating Interest rate

Fixed Interest rate

If a loan has a fixed interest rate then it means that the percentage of interest will never increase, whatever conditions are there in the financial market. Usually Low-interest periods are an excellent time for taking out a fixed rate loan.

Floating interest rates

Floating interest rates shows fluctuations with the market, which might benefit you or it might be bad for you. It all depends on the global and national economy. Since some term loans last for 10 years, so to assume that the rate will stay consistently low is a real risk.

What if the Term Loan uses Compound Interest?

Also you have to consider that whether the term loan that you are looking at uses compound interest or not. If yes, then the amount of interest will be periodically added to the principle borrowed amount, what it means is that the interest keeps getting higher as long as the term lasts.

If this is the case then you also have to see that if there are any penalties for early repayment of the loan. If you get a windfall or you get high profits then you may be able to pay off your entire balance before it is due, and thus preventing yourself from paying additional interest by waiting for the loan term to end.

Beware of extremely long repayment periods

Depending on your circumstances, choosing a term loan may be in your best interest. You should avoid extremely long repayment periods, as generally speaking, the longer is the term of loan, the more you will owe due to the reason that the interest accrues over a long period of time. If you want to get any more information, you can contact a financial advisor or speak to your bank about loan options they are providing to you.

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