Every banks deal with "Term Loan" as their financial product to attract customers. Majority of financing institutions are given their product as a term loan. They are probably, short-term loan for buying home appliances or long-term loan for buying a home or inter-mediate term loan for purchasing a car. Here we see the types and features of Term Loan.
What is Term Loan?
Term Loan means a specified amount of money given for a fixed period of time usually between one to ten years and to be paid back with interest agreed. It is a financial product designed to give either as a personal financial assistance to public or given to business organizations for a fixed period of time. It formates a relationship between bank and borrower to a specified period of time in which both parties should bound their terms and conditions stated in the agreement.
Features of Term Loan
Typically it features on floating interest rate for a specified amount of money, matures normally in between one to ten years and requires a specified repayment schedule.
Loan featured beyond one year, normally repaid from the future cash flow of the borrower. Lender must actively monitor how borrower comply utilization of loan amount and repayment schedule in order.
Purpose of Term Loan
Purchase of furniture, fixtures, vehicles, plant and office equipment. Maturity generally runs more than one year and less than five year but may go longer depending on amount and repayment schedule.
Classification or Types of Term Loan
There are three main classification found in Term Loans: short-term term loan, intermediate term loan, and long-term term loan. Classification focusing its length of time for which money is lent. Hire purchasing of home appliances, car loan, home loan, business loan, agriculture loan, loan for professionals etc are the few examples for term loan.
Short-Term Term Loan
It is a single purpose loan, matures within one year mainly to cover unexpected cash shortages. It helps to either protect a loss hence boost the cash flow or to make some good profit from the utilization deal. In some occasions, it works as working capital in the production industry for inventory purchase.
Intermediate Term Loan
A planned requirement with repayment period of 1 to 5 years becomes intermediate Term Loan. Repayment can be either from profit generated from the loan amount or from different sources. Purchasing a car may not bring direct profit but boost facility of business.
Long-Term Term Loan
Mortgage loans investing real estate and same sort of assets considered to be Long-term Term Loan. The loan amount may or may not generate profit and repayment period will be over 5 years. Banks have less risk, secure loan disbursement due to its mortgage collateral.
Special Commitment Term Loan
It gives a short period single use loan having less than one year repayment scheme. It is considered to be an interim finance support from bank side to purchase or protect or recover from an immediate crisis or needs. This loan purely depends on the relationship between customer and banks and may not be available for every aspects.
