Term Loan Explained: Types, Features, Pros & Cons

Loans are a form of financial assistance provided to individuals who require emergency funds. There are various types of loans tailored to specific needs, such as medical loans, car loans, home loans, personal loans, and more. The rate of interest charged on these loans is not fixed and depends on the market and the individual’s financial background. The interest charged on loans also depends on the type and tenure of the loan, such as long-term and short-term.

Table of Content

Different Types of Term Loans
Features of Term Loans
Pros and Cons of Term Loans

Similarly, there are term loans that have specific repayment tenures and a specific amount. These types of loans are ideal for businesses that have just been established and need funds to purchase equipment or expand their business. In most cases, the duration of term loans ranges from 1-20 years. Personal loans, car loans, etc., can be offered in the form of term loans, which can be further classified on the basis of tenure and type of interest rates. In exchange for financial assistance with specific borrowing terms, these types of loans are ideal for borrowers who need more flexibility.

Assessing your financial needs before choosing the loan term is of utmost importance for traditional businesses. At Muthoot Finance, you can find a wide range of financing options for all your business needs. Additionally, you can also speak to our financial experts to better understand what a term loan is and which would be the best option for you.

Different Types of Term Loans

Long-term Loans

This option of term loans generally offers a tenure of three to ten years, where some lenders may even offer a minimum tenure of five years. Borrowers opt for long-term loans to purchase business equipment or a property for business expansion. Since the tenure is longer, you can use the loan amount for significant capital purchases, as the monthly repayment amount on your loan type will be lower. You can use the Muthoot Finance term loan calculator to calculate the estimated amount that you would need to pay by the end of the term of your loan.

Short-term Loans

In this type of term, a lender may offer a maximum tenure of 18 months. In most cases, short-term loans are availed by borrowers who do not qualify for a long-term loan. However, availing a short-term loan and ensuring that you make timely repayments can help you build your creditworthiness. Short-term loans can be seen in the form of a personal loan. Availability of a short-term loan is ideal for borrowers who need to address a shortage of funds for emergency purposes.

Medium-term Loans

They are also known as intermediate loans. Lenders offer medium-term loans with a tenure ranging from one to three years or maybe five. Interest rates on medium-term loans are moderate, which requires a more structured repayment plan on the borrowers’ part. Medium-term loans cover expenses to support business growth.

Features of Term Loans

Interest rates: Term loans feature fixed interest rates or variable interest rates that may fluctuate
Repayment Tenure: Term loans are offered for a specific period of time in three different options, such as long-term, medium-term or short-term.
Amount: They come with a fixed loan amount; however, it may vary depending on the term the borrower chooses. Determining the loan amount can also give you clarity on choosing the term.
Category: Term loans are available in collateral and collateral-free categories.
Purpose: Borrowers can opt for term loans to purchase fixed assets or to clear existing debts.

Pros and Cons of Term Loans

Term loans offered by most NBFCs come with attractive interest rates. However, the longer the tenure a borrower chooses. The more they end up paying on interest charges.
Term loans are used by businesses to improve their cash flow. However, long-term loans require commitment and failing to comply may result in losing the ownership of the collateral item.
Startups and businesses alike may find it hard to avail long-term loans due to strict eligibility criteria. However, with repayments, you can enhance your CIBIL score to be eligible for long-term loans in future.
Short-term loans serve as a great option for urgent business needs but are not compliant with long-term loans.

There are so many factors to carefully consider before choosing a term loan. Whether it is for personal reasons or an urgent business need, assessing and understanding your requirements can help you make the right decision, which will eventually help you manage your finances better. As you explore your financing options, consider Muthoot Finance’s range of business or MSME loans to meet your specific needs.