A term loan is a popular financial product in India with a fixed repayment schedule over a specified duration. This loan typically features fixed or floating interest rates, with flexible repayment plans explicitly tailored to each borrower’s financial capacity. Indian lenders assessing business loan often require collateral and comprehensive documentation, and online platforms make the application process more straightforward. By providing access to structured financing solutions, term loans offer businesses and individuals crucial access to funding they can rely on to achieve their financial goals.
What Is a Term Loan?
In simple terms, a term loan is a type of financial product in which funds are disbursed all at once and then paid back over an agreed-upon term. It is typically used by both businesses and individuals to finance specific projects, expand operations, or meet immediate financial needs.
Types of Term Loans
- Short-Term Loans: Typically lasting less than one year, these are popular term loan offerings available today. Individuals who do not qualify for lines of credit may apply for short-term loans with repayment terms ranging between 18 months and five years. These loans are suitable for short-term financial needs such as working capital, inventory purchases, or unexpected expenses. Due to the shorter repayment periods, interest rates tend to be higher.
- Intermediate-Term Loans: These loans have terms between one and five years. They are ideal for business expansions, equipment purchases, or moderate-sized projects. Interest rates vary between short-term and long-term rates, varying between 7% and 15%.
- Long-Term Loans: These loans typically finance investments such as buying a home, expanding business operations, or higher education. Their interest rates tend to be significantly lower compared to short—and medium-term loans and can last from three to twenty-five years. Borrowers may use company assets as collateral and are required to make monthly or quarterly payments from profits or cash flow against debts, dividends, or principal salaries taken on by the business.
Features of Term Loans
● Fixed Repayment Schedule: Term loans have a set repayment schedule, ensuring borrowers know precisely when and how much money needs to be repaid each month.
● Fixed Interest Rates: The interest rates on term loans tend to be set, giving borrowers clarity on how much interest will accrue during the loan’s lifecycle.
● Collateral: Most term loans require collateral for security.
● Flexibility: To meet individual borrower needs and expectations, term loans offer flexible repayment terms and options.
Advantages of Term Loans
● Predictable Repayments: With a fixed repayment schedule, borrowers know precisely when and how much is due each month.
● Reduced Cash Crunch: Term loans provide immediate upfront financing, helping businesses avoid cash shortages and manage their finances more effectively.
● Flexible Fund Utilization: The longer repayment period allows borrowers time to raise the necessary funds and repay their loans in installments.
● Flexibility in Loan Amount: Term loans offer greater flexibility for various purposes, such as purchasing fixed assets like machinery or buildings or expanding businesses.
● Improved Credit Score: Timely repayments can help borrowers improve their credit ratings, making future loans easier to access.
Security and Collateral
● Secured Borrowings: Term loans are secured borrowings in which assets can be pledged as security or collateral against repayment to ensure timely repayment.
● Reduced Risk: Collateral can lower the risk of default and provide lenders with protection in case of non-payment.
● No Penalties for Early Repayment: Term loans can be paid back before their scheduled maturity without incurring penalties, offering flexibility in repayment.
Benefits to Businesses
● Instant Funding: Term loans offer immediate funding solutions to businesses, enabling them to meet their financial needs and reach their goals more easily.
● Improved Financial Management: Term loans allow businesses to manage their finances more efficiently by providing predictable repayment schedules and mitigating cash crunch problems.
How Does a Term Loan Work?
These loans are intended for long-term investments such as purchasing fixed assets, expanding operations, or meeting immediate financial needs. The application process typically begins online, where borrowers submit required documents, such as financial statements and ID proof. Lenders then evaluate the borrower’s credit score, financial performance, and collateral to assess eligibility and approve or decline loan applications accordingly.
Once approved, the borrower receives their loan amount and begins repaying it via fixed monthly installments, known as EMIs. Term loans offer predictable repayment schedules and interest rates, making financial management more straightforward for borrowers. Borrowers can also make partial prepayments to reduce their future payment burden. With their flexible use of funds and the potential to improve credit scores through timely repayment, term loan have proven indispensable for businesses and individuals seeking to achieve their financial goals in India, such as through MUDRA loans.
Factors Influencing Term Loan Approval
Below are the primary factors influencing term loan approval in India:
- Credit Score and History: A strong credit history proves that you can manage debt responsibly. Lenders conduct extensive credit and financial checks on prospective borrowers before granting loans, considering factors like credit profile, risk assessment, and the borrower’s stability. Financially sound businesses with proven results have a greater chance of securing favorable loan terms.
- Loan Purpose: The purpose of the loan plays a crucial role in determining its terms and conditions. Loans intended for specific uses, such as business expansion or equipment purchases, may have different eligibility criteria than working capital loans.
- Loan Amount: Loan amounts affect loan terms and conditions, with more significant sums often necessitating stricter eligibility criteria than smaller amounts.
- Loan Tenure: Repayment periods or loan tenures can directly influence loan terms, with longer tenures potentially leading to lower monthly installments but higher overall interest costs. Lenders may prefer shorter loan tenures as they pose less risk.
- Industry and Business Model: Lenders consider a borrower’s industry and business model when reviewing loan applications and may have preferences or restrictions depending on the risk profiles of both.
Conclusion
Term loans can be an indispensable financial resource for both businesses and individuals looking to meet their financial aspirations. By understanding their various types, features, and benefits, borrowers can make informed decisions that reflect their specific requirements. Term loans empower businesses by offering immediate funding with predictable repayment schedules and flexible terms to invest in growth, manage cash flow effectively, and bolster their credit profiles. Careful consideration must be made when seeking any type of loan product. Still, term loans offer particular advantages over their competitors when used wisely and can provide long-term stability and success for users.
Disclaimer:
CBD:
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Gambling:
As per the Public Gambling Act of 1867, all Indian states, except Goa, Daman, and Sikkim, prohibit gambling. Land-based casinos are legalized in Goa and Daman under the Goa, Daman and Diu Public Gambling Act 1976. In Sikkim, land-based casinos, online gambling, and e-gaming (games of chance) are legalized under the Sikkim Online Gaming (Regulation) Rules 2009. Only some Indian states have legalized online/regular lotteries, subject to state laws. Refer to the legalities here. Horse racing and betting on horse racing, including online betting, is permitted only in licensed premises in select states. Refer to the 1996 Supreme Court judgment for more information.
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