Term Loan

Financial Dictionary -> Loans -> Term Loan

A Term Loan is simply a Loan from a bank or other financial institution that has a specified principal amount (unlike a credit card) and a set repayment schedule with a fixed maturity date, when the loan must be paid back in full. Term loans also generally have a variable or floating interest rate. The majority of term loans will mature within a 10 year time period. The term loan is one of the most common forms of loan.

Al though term loans are not exclusive to businesses, the word itself is more commonly associated with business loans. A business may take out a term loan to help in its startup, or to cover operating costs for the first few years of operations. These are often popular because it frees up funds straightaway, and can be paid off over several years, giving the business a chance to start turning a profit.

Consistent short term loans might also be set up with a bank to cover month to month costs or with suppliers to pay for supplies and stock on a line of credit. Each month a fixed amount is given to purchase stock, which has to be strictly paid back at the same time the following month. This is almost like an overdraft.

Another common form of term loan are some student loans, which allow the students a grace period throughout their studies, and up to a year after graduation before repayment is due, and then they have several more years to pay it back, giving them a chance to apply their new found qualifications and earn a decent living worthy of paying back the borrowed money.

Before taking out a term loan you must consider the time it will take to realistically pay off the loan without eating in to the borrowed money, defeating the purpose of taking it out to begin with. Longer term loans may seem like a good option because it give you more time to turn a profit or make a living, but you will then have more interest to pay.