Growing a business or managing major expenses often needs more than just smart ideas, it requires proper funding. Whether you’re an entrepreneur planning to scale up, a professional upgrading equipment, or an individual facing a big personal expense, access to timely finance can make all the difference.
That’s where a term loan comes in.
A term loan is a reliable and structured financing option that helps both businesses and individuals meet planned or unexpected financial needs. But what exactly is a term loan? How does it work? And why is it such a popular borrowing choice? Let’s break it down.
What Is a Term Loan?
A term loan is a type of loan where a borrower receives a fixed amount of money upfront and repays it over a pre-decided period through regular monthly payments, known as EMIs (Equated Monthly Installments). Each EMI includes a portion of the principal and interest.
The interest rate on a term loan can be:
- Fixed – stays the same throughout the tenure
- Floating – changes based on market conditions
Term loans are available to both individuals and businesses.
- Individuals commonly use them for education, home renovation, medical expenses, or large purchases.
- Businesses use term loans for buying assets, expanding operations, or meeting working capital needs.
Repayment period varies by lender and product – from a few months for short-term loans to multiple years for long-term term loans; specific limits depend on product type and lender policy.
How Does a Term Loan Work?
A term loan follows a simple and predictable structure, making it easier to plan repayments. Here’s how the process works:
1. Eligibility Check & Loan Amount
The lender first evaluates your eligibility based on factors like credit score, income, employment history, or business financials. Once approved, the loan amount is decided based on your requirement and repayment capacity.
2. Fixed Repayment Tenure
The loan tenure is decided in advance. It could be short-term or long-term, depending on the purpose of the loan. Knowing the repayment timeline helps borrowers manage finances better.
3. Secured or Unsecured Loan
- Secured term loans require collateral such as property, machinery, or other assets.
- Unsecured term loans don’t need collateral but may come with higher interest rates and stricter eligibility criteria.
4. Interest Rate Selection
The lender offers either a fixed or floating interest rate based on market conditions, borrower profile, and loan type. Fixed rates provide stable EMIs, while floating rates may rise or fall over time.
5. EMI-Based Repayment
The loan is repaid through monthly EMIs. Borrowers can use EMI calculators to estimate monthly payments and plan their budget accordingly.
Types of Term Loans
Term loans are broadly classified based on their repayment duration.
1. Short-Term Loans
Short-term loans usually have a tenure of up to 12–18 months and are ideal for immediate financial needs.
Key Features:
- Smaller loan amounts
- Higher interest rates
- Commonly used for working capital, urgent expenses, or debt consolidation
These loans are popular among startups and small businesses that need quick funds without long-term commitment.
2. Intermediate-Term Loans
These loans come with a repayment period of 2 to 5 years and are suitable for medium-term goals.
Key Features:
- Moderate loan amounts
- Lower interest rates than short-term loans
- Ideal for buying equipment, business expansion, or renovations
Often preferred by MSMEs looking to grow steadily.
3. Long-Term Loans
Long-term loans have a tenure of more than 5 years, sometimes extending up to 25–30 years.
Key Features:
- High loan amounts
- Lower interest rates
- Used for real estate purchases, large projects, or major business expansion
These loans are best suited for established individuals and businesses with stable income.
Benefits of Taking a Term Loan
Here are some key advantages of term loans:
1. Easy & Flexible Repayment
Fixed EMIs make repayment predictable and manageable, helping borrowers maintain healthy cash flow.
2. Tailored Loan Options
Lenders customize loan amount, tenure, and interest rate based on your profile and financial goals.
3. Tax Benefits
In certain cases, the interest paid on term loans is tax-deductible, helping reduce overall borrowing costs, especially for businesses.
4. Multiple Usage Purposes
Term loans can be used for business growth, asset purchase, education, home buying, medical emergencies, or debt consolidation.
5. Fast Approval & Disbursal
With digital processes and minimal paperwork, many lenders offer quick approvals and fast fund disbursal.
6. Improves Business Cash Flow
For businesses, term loans provide access to capital without disrupting daily operations or working capital.
Factors That Affect Term Loan Eligibility
Lenders assess several factors before approving a term loan:
1. Credit Score
A good credit score shows financial discipline and increases approval chances with better interest rates.
2. Financial Stability
Businesses need to show steady revenue and profits, while individuals must provide income proof to demonstrate repayment ability.
3. Business Plan (For Business Loans)
A clear and realistic business plan helps lenders understand how the loan will be used and repaid.
4. Debt-to-Income Ratio
A healthy balance between income and existing debts improves eligibility.
5. Repayment Capacity
Strong cash flow or stable income reassures lenders about timely repayments.
6. Industry Risk
Businesses operating in high-risk industries may face stricter evaluation.
7. Borrower’s Track Record
A history of timely repayments builds trust and improves loan terms.
Conclusion
A term loan is a smart and dependable financing option for individuals and businesses aiming for stability, growth, or large financial commitments. With structured repayments, flexible tenures, and multiple usage options, it helps you achieve both personal and professional goals without financial stress.
Whether you’re planning a business expansion, handling medical expenses, or consolidating debt, LoanTap offers customized business loans and personal loans with quick approvals, flexible repayment options, and competitive interest rates, designed to match your unique needs.
Disclaimer: Eligibility, rates, loan amounts and turnaround times vary by lender and are subject to credit appraisal, documentation verification and lender policy. This article is for informational purposes only. For personalised assessment and exact product terms, apply on LoanTap or consult a LoanTap representative.
Frequently Asked Questions (FAQs)
1. How is a term loan different from a credit line?
A term loan provides a one-time lump sum, while a credit line allows you to borrow repeatedly up to a fixed limit.
2. Can I prepay a term loan?
Yes, most lenders allow prepayment, though some may charge a prepayment fee.
3. How is the loan amount decided?
It depends on your income, credit profile, repayment capacity, loan purpose, and type of term loan.
4. What’s the difference between fixed and floating interest rates?
Fixed rates remain constant, while floating rates change based on market trends.
5. How can I apply for a term loan with LoanTap?
Visit LoanTap’s website or app, fill in your details, upload documents, e-sign the agreement, and submit. Once approved, the amount is usually credited within 24 hours.
