What is a Term Loan?
Term loans are a form of financing where the amount borrowed is repaid through regular payments for a set period of time. Although term loans are typically for one to ten year, some can last longer than that. Customers can choose between a fixed or floating interest rate in some cases. In short-term loans, however, banks and lenders usually decide the interest rate. The fixed interest rate is the same throughout the term of the loan. The rate that was determined at the time the loan application was made will be the rate at which the borrower will pay the interest. This means that the EMI amount is fixed. A floating interest rate, on the other hand, fluctuates according to economic and market conditions. The installment amount will also fluctuate. A fixed interest rate is best for long-term loans. Borrowers can also opt for a floating interest rate when taking out a short term loan. However, there are exceptions to this rule. When a borrower has the option of choosing an interest rate, they should consider both current and future conditions. We’ll be discussing what term loan in lending is and what the features are that borrowers should know.
Features of Term Loans
There are two types of term loans: short-term loans and long-term loans. A short-term loan is one that has a shorter repayment term, typically between 3 and 3 years. Long-term loans are loans with a minimum tenure of three years. We’ll be discussing the benefits, drawbacks and other features of term loans.
Short Term Loans
A short term loan is a term loan with a shorter repayment term than one year or three years. Payday loans are a type of unsecured short-term loan that is not subject to the same interest rates as other loans. These loans can be repaid in as little as three to four months. Payday loans are still a new concept in India. However, some banks offer the option to customers with existing credit cards and loans to purchase electronic items with shorter tenures such as three to six month. Many banks and lenders also provide short-term secured and unsecured loans. Short-term loans are more flexible than other loans in terms of regulations. Both individuals and businesses who require urgent funds can apply quickly. Short-term secured loans are quick to approve and require minimal documentation. Some lenders and banks may not do a hard credit check. They do however carefully examine the applicant’s financial stability and ability to repay the loan. Some banks and lenders will offer short-term loans to borrowers with poor credit histories. These applicants may be charged a higher interest rate than applicants with good credit scores. These factors include the applicant’s salary, average monthly bank balance (MAB), outstanding debts, fixed obligations (FOIR) as well as employment history.
Long Term Loans
For a longer repayment term, long-term loans can be provided. Long term loans are available for a longer repayment term. Long-term loans can be used for higher amounts than other types of loans. Individuals who need large amounts of money quickly but can’t repay them over a longer time period of time may opt for a loan with a long term interest rate. These rates are lower than those for short term loans. The higher interest rate offsets the longer repayment terms and lower interest rates. Banks make more money by lending higher principles and longer repayment terms. However, long-term loans have lower interest rates. Monthly EMIs for long-term loans are easy to manage, even with tight budgets. The loan’s repayment term will allow the borrower to pay less. Low EMIs can repay each month over the loan term, reducing default rates. Certain types of long-term loans such as home loans may be eligible for tax benefits that allow the borrower tax rebates. This depends on the type of loan and current tax laws. This means that only the interest on the loan is eligible for a tax rebate. Some lenders offer long-term loans at fixed or floating interest rates. Long term loans should be financed at a fixed interest rate. A floating rate can fluctuate depending on market conditions. This reduces the risk for the lender and bank. Long term loans are almost always secured loans.
Consider the characteristics of term loans when deciding on which loan term you would like to take out. Individuals who require quick access to funds can benefit from short term loans. Long term loans, on the other hand are best for people who need large amounts of cash but need more time to pay it off.
