What Is a Term Loan?

If you are searching the world of loans, you have probably heard of term loans. But what actually is a term loan? This is a type of loan that you take from a bank for a specific amount, and it has a set repayment schedule and fixed or variable interest rate. For example, a $1,000,000 loan with a 4% interest rate and a five-year term would have 60 monthly payments of $25,000 each. They can be short-term or long-term loans, depending on what you are looking for.

With this type of loan, you have a set period of repayment, which is usually between one and five years. Term loans can be used for many different things, such as buying a real state or equipment to even using it as working capital. They are generally made by banks, but other financial institutions may offer them as well. Depending on your needs, this type can be used as a personal or business loan.

How Does a Term Loan Work?

Term loans provide borrowers with a lump sum amount upfront in return for specific borrowing terms. These loans are usually meant for small business owners, although you can use them to buy a house or property as well. Once a borrower asks for a certain amount to borrow, they will be given a repayment schedule with fixed or variable terms that are determined by the lender.

Examples of Term Loans

Term loans are usually repaid over a fixed period of time, such as five years. As mentioned before, they can be used for many different things, like buying real estate or using them as working capital.

Once you take out this type of loan, some lenders may ask you to provide collateral, such as your house or a car, to secure the loan, while others may not. Either way, the interest rate is fixed, which means it will stay the same over the life of the loan.

There are many different types of term loans available, such as personal, business, long or short term, but it’s important to know that terms can vary from lender to lender and as well your needs. For example, some loans may have a balloon payment, where you will need to repay the money back at the end of the loan term. On the other hand, other loans may allow for early repayment without penalty.

Whatever type of loan you decide to take, keep in mind that if you have a bad credit score, it might be difficult for you to qualify for short-term loans. Don’t be surprised if the lender rejects you since they don’t view people with bad credit as a safe option to give their money.

What Are the Different Types of Term Loans?

When talking about term loans, as we mentioned, it’s good to know that there are different options available, each one with its own pros and cons.

Here are some of the most common types:

• Traditional bank loans – Term loans are the most basic example of traditional bank loans. They can require collateral in the form of a down payment or a house. Usually, they have a lower interest rate.
  
• SBA loan – They are backed by Small Business Administration, hence the SBA. Typically they have a higher interest rate in comparison to bank loans, but you can qualify for them easier and get a longer repayment term.
  
• Equipment financing loans – These loans are used to buy a specific item such as a vehicle or machinery. You can get qualified easier than with bank loans since the equipment can be used as collateral. Note that they come with higher interest rates.

Benefits and Drawbacks of Term Loans

It’s important to note that with every loan, there are pros and cons. Term loans have some amazing benefits, such as the ability to spread the repayment term length, which makes the loan more affordable. On top of that, this type of loan can provide businesses with the needed funds to make a purchase or investment. However, there are also some setbacks. The biggest one is that they tend to have higher interest rates in comparison to the other loans. Additionally, if a business is unable to repay the loan, it could put its assets at risk.

Benefits

As mentioned before, there are some great benefits to taking out these types of loans. Whether you are looking to use them for your business or for your personal needs, we will give you some pros they bring:

• They can be used for a variety of purposes
• The repayment schedule is fixed, which makes it easy to budget
• They can provide access to larger sums of money than other types of loans
• They offer short terms

Drawbacks

While a term loan can provide your business with much-needed capital, it’s not without its setbacks.

That’s why it’s good to do your diligence and research before taking out a loan.

Here are some drawbacks to consider about:

• They tend to have higher interest rates in comparison to other loans
• They have fixed or variable rate terms
• They require collateral to be but to secure the loan
• If you have bad credit, you can’t qualify for them

Final Thoughts

If you are a small business owner or you are just looking to buy real estate, term loans can be a good thing for you. Here we gave you an inside on what term loans are, what types you can choose from, and as well the pros and cons of getting one.

If you decide to get out a loan, at the end of the day, it’s very crucial to compare different lenders and their offers before signing your name on the dotted line. With all of that said, we hope you find the best fit for you and your finances.