Term loan can be defined as the monetary loan from a bank for a fixed amount that comes with a floating rate of interest and particular repayment schedule. Mostly, the term loan matures between 5 to 10 years. Term loan is mainly used to expand, diversify and modernize the projects. If an individual is getting term loan, he/she needs to consider whether the interest rate is fixed or floating.
Loan comes with a number of advantages both from the borrower’s as well as transferor’s point of view. From the borrower’s point of view, term loan is the cheap and best option available for medium-term financing. The borrower also enjoys tax benefit on interest as interest payable on term loan is a tax deductible expenditure. Apart from this, term loans are quite flexible as there is a scope of negotiation between the lenders and borrowers.
From the lender’s point of view, Loans are equally advantageous as the loans are given by financial institutions and banks against security, thus these loans are secured. Apart from this, term loans also act as a steady and regular income for the lenders as borrowers need to pay the interest and repayment of principal irrespective of its financial position. Loans are classified into two main categories by the bankers namely Intermediate-Term Loans and Long-Term Loans. Intermediate Term Loan are repaid in monthly instalments from a business’s cash flow and are active for less than three years.