What Is Term Loans, Types and Examples of It
In banking, a non-revolving loan or credit facility is a term loan. This loan is used for long-term or medium-term investments. Returns on term loans can be paid in installments based on the debtor’s ability. Let’s check the article below to learn more about term loan.
What is a Term Loan?
If discussed simply, this credit is often loaned or used for business owners. The characteristic of a term loan is non-revolving, meaning that the loan facility, repayment, and withdrawal are not done repeatedly.
To grow a business, a term loan is often used. For the loan, there is an agreement on a certain amount of money. In addition, the debtor agrees to the payment of the due date along with interest.
However, the debtor can choose the repayment method based on their financial capability. Debtors who use this loan, need to fulfill certain requirements from each bank. This is necessary for the application process.
What is Non-Revolving?
In the case of capital, a non-revolving loan is a credit/loan that must be paid in installments or repaid according to the agreement. You can also say that this is productive credit. This loan activity is proposed by a certain party to get results from their business.
Unlike a revolving loan, this credit facility could be used repeatedly. There is a certain maximum limit that has been approved by the bank. Revolving is usually permanent with funding listed in the cash flow. Revolving loan debtors can make payments or withdrawals from time to time during the loan period.
Term Loan Working System
Simply put, the working system of a term loan is that this loan works if the company provides collateral as a creditor to the bank. If the debtor does not meet the requirements, the debtor’s collateral is auctioned off by the creditor.
Requirements may vary for term loans at each financial institution or bank. However, repayment is done in several ways as below:
- Gradual installment of fees
- Installments based on the same principal value every month.
- Refund of interest at the end of the period
In addition to the points above, you also need to know what factors can affect the interest rate. For example, financial institutions increase interest the longer the loan is. Other factors include the level of the loan, the amount of the debtor’s previous debt, and so on.
When a term loan is applied for, it is necessary to ask about the terms of the creditor to be safer.
Benefits Of Term Loan
A term loan is provided by insurance companies, pension fund institutions, government financing institutions, and commercial banks. The term loan is expected to help micro businesses grow and improve the country’s economy. Another purpose of a term loan is for the welfare of society. So if you are a small business owner, you can choose this to improve your business.
How It Differs From Leasing?
The term loan is a type of medium-term financing. The capital cost of a term loan is low. While leasing is financing with capital goods (lease without or with option rights). Leasing payments are made in installments and within a certain period.
The difference between the two can be seen in who provides the costs. Financing in term loans is a loan from a banking institution. While in the case of leasing, the finance company provides the loan.
Understand About Term Loan?
That’s the explanation about the term loan. If you are interested to grow your business, make sure you also read several other business articles from Vincoguide too!
