Term Loan - Meaning, Types, and Category

A term loan can be defined as a time loan approved and disbursed by a bank, NBFC or credit institution. Such a time loan may be a short-term or long-term loan that must be repaid in regular installments, such as equal monthly installments, within a specified period of time. The interest rate to be paid may be a fixed or a variable one.

The term of the loan may range from 12 to 60 months. Banks and non-bank financial institutions offer such loans as a variety of loan products, including business loans, personal loans, home loans, education loans, gold loans, and auto loans.

Types and Categories of Term Loans:

Types of term loans are classified in terms of time-period as follows.

• Short Term Loan
  A short term loan may be defined as a loan offered, approved, and disbursed by a lending institution for a short period of time ranging from 12 to 24 months.
• Long Term Loan
  A long term loan may be defined as a loan offered, approved, and disbursed by a lending institution for a long period of time ranging from 10 years to 30 years.

Term loans are categorized in terms of security as follows:

• Secured Loans
  A term loan may be categorized as a secured loan when the loan requires collateral security in terms landed estate, residential or commercial property, equipment, machinery, raw material, stock, or other assets. Secured loans as a rule are available at low rates of interest.
• Unsecured Loans
  A term loan may be categorized as an unsecured loan when the loan requires no collateral or security. These types of loans are high-risk loans, and thus are available at higher rates of interest.

A term loan may be further categorized by the purpose of the loan. Thus, if you seek to avail funds or if you seek a loan for a business purpose, the purpose could be:

• Business Expansion
• Equipment, Machinery, or Raw Materials Purchase
• Cash Flow
• Working Capital Needs
• Purchase of office, or Business Space, or Land
• Rents and Salaries Payments
• New Staff Hire
• Debt consolidation

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