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What is a Term Loan? and When Should Company Prefer to Take a Term Loan ?

Updated: Dec 7, 2023

What is a Term Loan?

A term loan is a type of loan in which a lump sum amount is given to the borrower for a fixed period ranging from one to ten years. The borrower needs to repay the loan as per the repayment schedule. In term loans, Interest can be either fixed or floating as per market conditions.

Features of Term Loan

1. Secured Loans: Term loans are secured loans. If borrower purchases any asset from the borrowed money, that asset will be considered as primary security for the lender and other assets will be provided as collateral security.

2. Repayment: Term loans must be repaid in regular instalment irrespective of the financial situation of borrower.

3. No Dilution : If a business takes term loan, it cannot be converted into equity, therefore, lender will have no right to control the business.

4. Negotiable: The terms & conditions of term loan are not rigid but negotiable.

5. Restrictions: The borrower needs to follow all the restrictions imposed by the lender namely, no additional loans, closing existing loans and maintaining the asset base.

6. Currency: Banks offer term loans in Indian as well as Foreign Currency.

When Term Loan should be taken?

1. Term loans are usually taken for buying assets such as land, buildings, machinery and equipment.

2. It is suitable for fulfilling short term financing needs of the borrower.

3. Term loan is a possibility only if borrower can provide collateral security to lender.

4. Term loan can be taken to finance the repayment of a high-cost loan.

5. Term loan should be taken if the borrower is financialy capable to repay.

6. Term loans are a good choice if the borrower doesn’t require the money urgently as it can take time.

Market Interest Rate for Term Loan

Interest Rate on loan varies as per the tenure, borrowed amount, financial position of borrower and the type of rate system being followed.

Here are given market interest rate for certain banks in both fixed and floating rate system.

Fixed rate

HDFC Bank: 10.50% onwards

ICICI Bank: 10.50% onwards

Tata Capital: 10.99% onwards

Axis Bank: 10.49% onwards

Floating Rate

Punjab National Bank: 10.40% - 16.95%

Bank of Maharashtra: 10% - 12.80%

Bank of Baroda: 10.80% - 18.25%

UCO Bank: 12.45% - 12.85%

Whenever taking term loan, a borrower should be careful about needs and financial position, read all the documents carefully and perform due diligence during the process.

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