A term loan, meaning a loan with a fixed repayment period, is a common financing tool used by both individuals and businesses. In this article, we’re going to explore term loans in detail, sharing everything you need to know on the topic.
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Feel free to use the table of contents to jump ahead to the sections most relevant to you.
Table of Contents
- Term Loan Meaning
- What Are the Types of Term Loans?
- Personal Term Loan vs Business Loan
- What Is the Difference Between a Term Loan and a Normal Loan?
- Frequently Asked Questions
- Ready to Open Accounts With Banks in the USA?
Term Loan Meaning
A term loan, meaning a loan with a fixed repayment period, can be obtained by individuals for personal use and businesses for commercial use. There are several types of term loans with varying interest rates, repayment terms, eligibility criteria, and application requirements.
The financial institution offering term loans typically sets its own eligibility criteria. This is the same for credit card companies that offer credit cards for kids, adults, and businesses.
However, there are general principles that apply to who can and cannot qualify for a term loan. Not surprisingly, creditworthiness, related collateral, and the borrower’s financial position are all important considerations.
What Are the Types of Term Loans?
There are a number of different types of term loans. The most common term loans for individuals include traditional short-term loans, real estate loans, and automotive loans. The most common term loans for businesses include equipment financing, construction loans, bridge loans, and Small Business Administration loans.
Personal Term Loan vs Business Loan
The main difference between a personal term loan and a business term loan is that a personal term loan is obtained to support individual financing needs while a business term loan is obtained to support business financing needs. In other words, personal loans are for people and business loans are for businesses.
But besides the fact that the purpose and borrowing parties are different between personal and business loans, there are also differences in the approval process and the loan values.
Personal term loans require documents related to the individual borrowers, their credit, and the underlying asset or collateral. On the other hand, business term loans require documents related to the owners of the business, financial statements and projections, tax returns, corporate documents, and much more.
Additionally, personal-term loans are typically capped depending on the purpose of the financing. Business term loans are usually much higher in value and can support major capital projects and operational requirements.
What Is the Difference Between a Term Loan and a Normal Loan?
The main difference between a term loan and a normal loan is that a term loan refers to a financing arrangement with a specified end time while a normal loan can refer to a wide range of financing options.
In other words, a term loan is a specific type of loan while a “normal loan” can include term loans and other financing arrangements like lines of credit. As a result, a “normal loan” may have more flexible repayment terms, and different interest rate structures, and cater to a wider range of borrower profiles.
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Frequently Asked Questions
Below are three of the most common questions we receive from people looking into the meaning of a term loan. If you have further questions you would like to ask our team, don’t hesitate to get in touch.
What Are the Common Attributes of Term Loans?
The most common attributes of term loans include the amount of the loan, the term (or length) of the loan, the interest rate applied to the loan, whether the interest rate is fixed or variable, the collateral, and how the term loan is amortized. In certain instances, there may also be penalties applied for early repayment of the loan.
What Is a Term Loan Example?
A term loan is a financing arrangement that involves repayment of a loan from a financial institution over a specified period of time. There are examples of term loans for both businesses and individuals. Examples of business term loans involve capital for acquiring or expanding companies while examples of personal term loans involve mortgages and automotive financing.
What Are the 3 Types of Term Loan?
The three types of term loans include short, intermediate, and long. Different types of financing fall within each of these types of loans, ranging from automotive loans to home mortgages. Short-term loans typically require repayment within one year or less. Intermediate-term loans typically require repayment in one to three years. And long-term loans have a repayment period of over three years.
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