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.
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If there is a fixed rate of interest, the percentage of interest will never increase while the floating rate of interest will fluctuate with the market.
Requirements for Term Loan
- Latest Balance Sheet
- Average DSCR, not less than 1.75:1
- Fair credit rating for the last three years
- Total Debt-equity ratio that is not higher than 4.5:1
- Total Term Liability and equity ratio that is not more than 3:1.
- Good financial performance in contexts of Sales/turnover and profits.
Features
- Term loan is convertible into equity
- Loans are known as secured loans
- There is a fixed rate of interest on term loan
- The maturity period of term loan is between 5 to 10 years
- There could be restrictions by the lenders on the borrowers to not to raise additional loan, maintain a minimum asset base and repay existing loans
Advantages for Borrowers
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.
Advantages for Lenders
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.
On the other side, Long-Term Loans are set for more than three years, generally between three and 10 years. The duration of these loan further extend to 20 years. These loans require quarterly or monthly payments out of the profits or cash flow. Today, banking institutions offer a variety of repayment plans for Loan. Thus, it becomes easy for individuals to opt for any plan that fits best for paying off the debt in even amounts. After considering the current financial circumstances, the need is just to choose a term loan in the best of interest. It has to be taken care that longer the term, the more an individual will owe as the interest accrues over a long period of time.