In case of goods, while some goods like fruits, vegetables are consumed as soon as they are bought while some goods like furniture item, electronics are used for a long period of time, similar is the case with loan while some loans are short term in nature whereas some loans are taken for a long period of time. The term loan is the term used in the context of banking; it refers to that loan which is given by the bank to the borrower for long term use and the borrower has to pay regular interest which may be fixed or floating to the bank along with the principal amount. In order to understand more about this concept, one should look at various important features of the term loan –
Term Loan Characteristics
Fixed Tenure
The first and foremost feature of the term loan is that it is for a fixed period of time and since it is for a fixed period of time the borrower can plan the repayment of principal amount as well as regular interest amount accordingly. Hence for example, if the borrower has taken the loan for a period of 5 years than the borrower can schedule the installments of the loan accordingly so that he or she does not have to face liquidity crunch due to demand from the bank or financial institutions for repayment of the loan.
Long Term Loan
Another feature of this type of loan is that it is for long period of time; hence term loans are not for 6 months or 1 year rather the time period for which this loan is taken ranges from 5 years to 20 years. Hence when you talk about long term loans than in the majority of cases you are talking about term loans.
Interest on Full Amount
Banks or financial institutions charge interest on the full amount sanctioned under this type of loan whether you use the full amount or partial amount of the loan amount sanctioned. Hence, for example, suppose a bank has given $100000 term loan and rate of interest on the loan is 9 % than whether you use $10000 or $100000 of the loan amount bank will charge interest on the whole amount that is $100000.
Large Amount
The amount under term loans is large and not small which is the reason why tenure for repayment of this loan is long besides interest is also low as compared to the short term loan. Hence for example, if you go to the bank for $2000 or $5000 term loan then the bank will not give you the loan.
Used for Fixed Assets and Long term Investments
A term loan is generally used by companies for purchasing fixed assets like land, building, machinery or for making long term investments. In simple words, companies seldom take term loan for day to day operational expenses or for the working capital requirement as these loans are taken for purchasing of fixed assets or making long term investments.
As one can see from the above characteristics of the term loan that this loan is different from other types of loan and that is the reason why if you are thinking about taking term loan facility from the bank than you should read above features carefully and then decide whether to take this loan or not.