written by khatabook | December 1, 2022

Everything you Need to Know About Term Loan and How it Works

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Table of Content


Term loans are, by nature, borrowed for more than five years usually and may go up to 30 years depending on the project undertaken by the entity. For example, debentures typically have more than 10 years of redemption.  The word “Term Loan” is used to explain the significant factors of your loan. 

Did You Know? Term loans may be borrowed for floating or fixed rates of interest.

What is a ‘Term Loan'?

A term loan is a monetary obligation of an entity borrowed to build long-term economic resources, which are paid over a set period in fixed, regular instalments. The floating rate of interest is usually the market interest rate prevailing at a particular time which the commercial bank fixes. The terms and conditions of a loan are the provisions that are agreed to with the aid of the lender and borrower.

The government also provides ‘term loans’ at a subsidized interest rate under various schemes. A substantial portion of their projects is financed from commercial bank lending in the form of ‘term loans’. Borrowers prefer term loans because they offer more flexibility and lower interest rates.

Also Read: Government Loan Schemes for Small Businesses In India

Types of Interest Rates on Term Loans

Depending on the tenure and the nature of the borrowing, there are two types of term loans. 

These are as follows - 

1. Fixed Interest Rates

A fixed-interest loan carries a fixed interest rate on the loan amount throughout the loan. The fixed rate of interest usually is higher than the floating interest rate. The fixed interest rate on the term loan may depend on several factors like the borrower's credit rating, a record of default, loan period, etc. The higher the loan period, the lower the interest rate. Likewise, an excellent credit rating will mean a low fixed interest rate.

2. Floating Interest Rate

A floating-interest loan carries a fluctuating interest rate on the loan amount. The floating interest rate is set close to the market rate of interest (Repo Rate) set by the Reserve bank of India through its monetary policy. 

3. Interest Rates

Following are the fixed and floating interest rates as of 21st of November 2022 offered by different lending institutions: 

Lending Institution

Fixed Interest Rates

Floating Interest Rates

Bank of Baroda

8.50 % - 12.26 %

10.25 % - 17.60 %

UCO Bank

10.70 % - 13.20 %

11.95 % - 12.35 %

Union Bank of India

9.50 % - 14.80 %

10.80 % - 14.90 %

Punjab National Bank

8.15 % - 15 %

9.80 % - 16.35 %

Punjab & Sind Bank

10.55 % - 12.46 %

10.55 % - 12.15 %

Bank of Maharastra

8.00 % - 12.32 %

8.90 % - 14.70 %

State Bank of India

10.65 % - 15.15 %

11.20 %

HDFC Bank

11.00 %

11.49 %

Also Read: What are the Different Types of Loans in India?

Which Lending Institutions offer ‘Term Loan’?

Historically, commercial banks were the largest lending institution. With the increasing size of the capital market, various other institutions have emerged as a source of financing for long-term projects. Here are a few of them :

1. Commercial Banks

Commercial banks like HDFC, State Bank of India, Axis Bank, etc are one of the most traditional sources of term loans for businesses. Commercial banks also offer term loans to Individuals such as housing loans, car loans, etc. There are also various government schemes offered to small businesses to get term loans at subsidized rates of interest.  

2. Banking Companies

The Reserve Bank of India grants several companies with banking licenses to operate as financial institutions in the Indian economy. These companies also offer term loans at relatively low-interest rates. 

For example, Union Bank of India offers term loans to help you acquire capital goods or asset creation for your firm on a long-term basis. 

HDFC Bank offers ‘Term Loans’ for the tenure of 5 years for expanding their business, for capital expenditure and fixed assets. 

3. Non-Banking Financial Companies (NBFC)

NBFCs or Non-Banking Financial Companies are one of the biggest sources of corporate borrowing. NBFCs offer both short-term and long-term loans to corporate houses. They also offer personal loans to the individual borrowers at a very nominal rate of interest. Investment banks, mortgage lenders, money market funds, insurance companies, hedge funds, private equity funds, and P2P lenders are all examples of NBFCs.

Also Read: Cash Credit Loan - Eligibility, Interest Rate, Features & Benefits

Examples of Long-Term Borrowing

There are various examples of long-term loans with varying risks and interest rates, and the loan period. Many of the term loans initially have a low amount of instalments, and as the settlement period gets near, the amount of instalments increases. Here are a few of them - 

  1. Business Loans

Business loans are one of the largest forms of commercial lending. These may be borrowed for the purpose of financing long-term projects having a high gestation period. These types of long-term projects involve cash inflow only after the initial development of the project takes place, requiring the funds to be blocked without yielding any short-term yield.

Business loans are categorized as highly risky since a large sum of funds is borrowed by a single business which may awfully fail depending on the risk appetite of the project involved. Nevertheless, business loans drive secure and steady returns to the lending institution over a long period of time.

  1. Housing Loans

With growing housing prices, the affordability of housing is getting hurt. The debt may provide that confidence to buy a house that may otherwise not be affordable with personal savings. These are also a type of term loan with a lending period ranging from 5 - 25 years or even higher.

  1.  Vehicle Loan

Vehicle loans taken for vehicles and loan period may range from 2 to 5 years, depending on the amount under finance. Commercial banks provide vehicle loans at affordable interest rates to individual buyers too. However, the lending institution may risk losing assets, accidental damages, or a fall in the market value of vehicles. Due to this, the vehicleis insured to hedge the risk. 

  1. Education Loans

Higher education is one of the largest expenses made by an individual. High-cost education like MBA, Medical, and Engineering involves a huge sum of money which may not be affordable for many families. Education loans are taken for a long period and paid only after the person completes the education, gains professional competence and starts working. However, the interest may continue to accrue over the gestation period. 

Conclusion

Term loans are one of the most viable ways to finance the long-term needs of a business organisation. Multiple lending institutions like commercial banks, banking companies, and NBFCs provide term loans at very affordable rates of interest. So far, we have discussed various types of interest rates, current interest rates, various lending institutions, followed by a few examples. 

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FAQs

Q: Why is the duration of loan Important?

Ans:

The length of the loan term, or how much time the borrower has to repay the loan, greatly impacts a debt's affordability.

Q: What are a few examples of the term loan?

Ans:

Business loans,Housing Loan, Vehicle Loans, Education loans, etc are a few examples of term loans.

Q: Which banks provide long-term loans to industries?

Ans:

Banks that provide long-term loans are Regional Rural Banks (RRBs), State Co-operative Banks (StCBs), District Central Cooperative Banks (DCCBs), Commercial Banks (CBS).

Q: What is Term Loan?

Ans:

A term loan is a monetary obligation of an entity borrowed to build long term economic resources paid over a set period in fixed regular installments. Term loans usually are borrowed for a period ranging from 5 to 30 years.

The floating rate of interest is usually the market interest rate prevailing at a particular time which the commercial bank fixes.

Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.
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Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.