Term loans refer to credits offered by financial institutions against a specific repayment schedule and (fixed or floating) interest rate.
These credits are usually offered to businesses, helping them financially to procure equipment, create the necessary infrastructure, or even to boost working capital.
Term credits can refer to both secured and unsecured credits; most loans are disbursed against a shorter tenor and a competitive term loan interest rates.
Borrowers can pay off the credit in equated monthly instalments, which makes it convenient for organisations that have a steady source of income.
Term loan in India
Both short and long-term loans touched an all-time high in 2019, according to a recent study conducted in May 2019. It increased by almost 7.2%, reaching a total of Rs.24 lakh crore, overtaking retail loan growth for the first time in 7 years.
Experts attribute much growth to new guidelines regarding market regulation, the introduction of various government policies to assist borrowers, and revised terms and conditions that contribute to a more transparent system.
There are various terms and conditions applicable to these types of credits, as well as several factors that affect such business loans. Let’s take a look at some of the essential aspects that a borrower should know before availing a credit.
- Types of credit –
There are primarily three types of term loans available on the Indian financial market, depending on the repayment tenor selected by particular borrowers.
Short-term loans refer to unsecured advances, with loan tenors of up to 60 months. These are ideal to fulfil small-scale financial requirements and are one of the most popular types of business loans.
Intermediate term-loans or mid-term loans offer a longer repayment tenor, as well as a larger loan amount.
Businesses avail these credits for expenses that require more financial backing, for example, to overhaul machinery, increase working capital, etc.
Long-term loans are secured credits. A substantial loan amount and longer repayment tenor (which can reach up to 25 years) distinguish these credits from other types of advances.
Companies avail long-term loans to pay for expenses related to infrastructure, business growth, etc. or when substantial funds are required as an investment. These usually offer the lowest term loan interest rates.
- Fixed loan amount –
Term credits offer a fixed loan amount, depending on the type of loan a prospective customer wishes to avail.
However, the sanctioned loan amount may vary from the total limit; lenders evaluate multiple factors (like repayment capacity, revenue, existing credit history, working capital, etc.) before the approval and disbursal of a credit.
- Fixed or floating interest rate –
Borrowers availing these credits have the option to select either fixed or floating rates of interest.
Both offer certain advantages; for example, fixed interest rates come with a pre-determined EMI, which allows for better financial planning for the future without compromising with the steps to raise business finance.
Contrarily, floating interest rates usually stay 2% to 3% lower than fixed rates. However, these rates are revised on a quarterly basis based on the financial market, and can both increase or decrease a borrower’s liabilities.
- The total cost of a loan –
The total repayment amount includes the principal sum, relevant interest, as well as any fees and charges that may be applicable on that particular credit.
These usually include processing fees, statement charges, and business loan documents processing charges. Other than the ones mentioned above, borrowers will be liable to pay penal interest (if they miss the due repayment dates) and bounce charges in some situations.
Every prospective customer should carefully consider the total cost of a loan while applying for credit. Steep fees and charges paired with term loan interest rates can increase the total payable amount by a substantial margin.
Both public and private sector financial institutions offer term credits to eligible applicants. NBFCs like Bajaj Finserv even provide pre-approved offers that help save time during the application process.
Make sure you refer to the loan terms offered by different lenders thoroughly before making a choice. Meet the eligibility criteria as mandated by a lender to benefit the most.