Term Loan Definition – Understanding The Types of Term Loans

A term loan is loans of a specific amount attached with a specified repayment schedule and a fixed or adjustable interest rate. It is advisable to practice some down payments in a term loan to enable you to reduce the payment amounts and the total cost of the loan. Moreover, businesses with good financial statements can comfortably apply for this loan.

Term Loan Definition - Understanding The Types of Term Loans

WHAT YOU SHOULD KNOW

  • A term loan is issued by a bank with a fixed amount. And payment schedule of either a fixed or floating interest rate.
  • Companies with a good financial statement often. Use term loans to purchase fixed assets e.g. new buildings or lands or sites for a new production process.
  • D o you know that term loans is obtainable. As long-term facilities with fixed payments. Short and intermediate-term loans may require balloon payments.
  • Do you know that both intermediate-term loans and shorter long-term loans may also be balloon loans? This is because balloon payments will be applicable. Again, the final payment swells to a larger amount to be paid other than the previous ones.
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Term Loan

Most often, a Term loan is usually used for the purchase of asset equipment such as real estate, or working capital which can be paid off within one and 25 years. Small businesses can as well use them to purchase fixed assets e.g. new sites for the production process while some borrowers term loans as a source of finance for their monthly operation. This type of loan is strategically offered by banks to help companies establish more.

A term loan line of credit can be a fixed or variable interest rate depending on the benchmark rate it is operating on (U.S prime rate or LIBOR). This loan also carries a monthly or quarterly repayment schedule and due date. Assuming the loan is used to purchase an asset, that asset can as well impact the repayment schedule if the assets become useful. Term loans require collateral and a lot of paperwork is involved to reduce the risk of default (failure to make repayment). You can even pay off ahead of time, attracting no penalty.

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Types of Term Loans

Term loans are in several varieties captioned on the lifespan of the loan.

  • A short-term loan:

  • This type of term loan is mostly served to films with poor credit statements. Generally, this will last in less than a year or up to 18 months.
  • An intermediate-term loan:

  • This type of term loan runs more than a year but cannot exceed three or perfectly less than three years. Payment can proceed with monthly installments from company‚Äôs cash flow.
  • A long-term loans:

  • This can take a maximum of 25 years starting from three years and above. There is a demand for collateral with quarterly or monthly payments from the profit or cash flow of the company. However, this will require more paperwork. Companies under a long-term loans will have to limit other financial commitments to be able to earn the required amount of profit for the repayment of the loans.

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