A term loan is a loan in which a borrower pays the amount borrowed within a timeframe or the term.” A term is the duration within which you must pay the complete dues”. The term can be 6 months and as long as a maximum of up to 25 years. For example, a quick loan holds a term length of 3-6 months.
However, a mortgage lasts for about 25-30 years. So, understanding the term is important before taking a term loan. The blog explores the concept of term loans, their variety and how to prefer the good one.
How would you describe a term loan?
A term loan is an amount a borrower receives to meet specific personal requirements. Here, the “term of the loan” guides to the duration within which one must compensate the loan (interest + principal amount).
If he qualifies for the terms, he settles the loan amount in monthly instalments. The term, also known as the repayment period, maybe as long as 25 years or less than that.
For example, if you take up a home renovation loan for 5 years, repay it within 5 years. Here, “15 years” is the loan term.
The loan term decides the interest rate, monthly payments, and the total repayment amount. You pay a high monthly instalment on short term loans, but interest remains low. Alternatively, you pay small monthly payments on a long-term loan, but high interest over the loan term.
Let’s analyse key loan terms in detail. It will support you in making a knowledgeable decision..
Important terminology to know before seeking a term loan
When you contact a loan provider to borrow an amount, you generally get a quotation. It is the initial quote that lists approximate costs. However, you will receive a full-blown loan agreement later stating the costs in detail. Here are some terms that you may find in the agreement:
Loan amount
A loan amount is the total sum of money that you borrow to meet a specific need. Later, you must pay this amount alongside the interest and other loan borrowing costs. For example, if you borrow £12000 for home repairs, £12000 is the borrowing amount.
Repayment period (loan term)
A refund period is a term within which you must pay back the borrowed loan amount. Loan duration can differ from months to years, depending on the needs, credit score, and income.
Interest rates
The rate of interest is the charge that you settle to the loan provider to borrow money. It is different from the principal or the borrowing amount. No two individuals get the same interest rate on a loan.
Instead, the interest rate you get depends on the credit rating, affordability, loan term, and the specific loan provider’s terms. One can choose between fixed and variable interest rates according to comfort. In case of variable interest rates, the interest may change according to economic shifts.
Annual Percentage Rate (APR)
APR represents the annual charge of a loan. Interest and other charges included with the loan are a part of it. One generally sees a representative APR listed on the websites. It is not the actual APR that one gets. The APR a person get depends on the credit score, pending payments, and employment history. To some extent, a loan provider’s specific standards also decide it.
You pay more if the APR on a loan is high. Therefore, always explore the best possibilities to get the lowest APR on a loan.
For example, if you borrow a loan with a 5.6% APR. You must pay 5.6% of the total amount you borrow as interest and the loan fee.
Repayment Schedule
A repayment timetable is a straightforward document of the loan payments that one must make over the term. It lists the due dates, monthly instalment amount, and how much each payment goes to interest and principal. One must pay according to the specific repayment schedule. You can also pay the dues by using the direct debit facility.
If you decide to get £8000 with a 24-month repayment term, you must pay the loan in the following way:
| Loan amount | £8000 |
| Loan repayment term | 24 months |
| Interest rates | 6.5% |
| Monthly repayment amount | £355.70 |
| Total amount repayable | £8536.80 |
| Total interest costs | £536.75 |
Thus, by paying £8536.80 in instalments by the loan term ends, you can get debt-free.
Loan fees
It is the total fees that the loan provider may impose on a loan. It is different from interest charges and the principal. It may include arrangement fees, application fees, executive charges, and late payment penalties. In some cases, it also includes an early payment fee
Define different term loan types and their operations
You may usually encounter the 2 most important loan forms. It is a short-term and long-term loan. If you are not familiar with any of these, read ahead:
Short-term loans
Short-term loans are a type of term loan that one considers to meet emergencies or any other small financial needs. Precisely, it is for bridging the monetary needs. The amount you get here is £10000 (maximum) for your needs. The repayment term stays 3-12 months on these types of loans.
However, the interest rates stay competitive due to no guarantor or collateral requirements. This loan type does not involve a detailed credit check. Hence, it does not hamper the credit score. Here is how a short-term loan works: :
Long-term loans
Long-term loans are a type of term loan which one considers to meet long-term life goals. One may consider it for financing the child’s education, buying a house or property development. You may get up to £25000 as an unsecured loan and over £2m as a secured loan on these loans.
The terms may stay fixed or variable depending on your preference and the loan provider’s standards. You can borrow a higher amount than with short-term loans for your needs.
The rates of interest on long term loans are lower than comparison to short-term loans. This is because these loans grant the flexibility to spread the loan costs in affordable and small instalments. The repayment term stays 12 months- 25 years, depending on the loan and the affordability. The loan provider may demand collateral or a guarantor if you cannot afford the payments. Moreover, this type of loan involves detailed credit checks that may affect the credit rating temporarily.
Fixed interest loans
A specified rate loan is a loan type where the interest charges remain exact throughout the loan term. This means that monthly installments will also remain fixed over the loan term. It grants the flexibility to save the repayment amount without worries. It helps you plan other finances without disturbance.
Variable rate loans
An irregular rate loan is a loan category where the interest rate may change according to economic changes. This means that interest rates may fall when the economy improves. Alternatively, the interest rates may rise if the economy suffers.
Individuals may benefit from the fall in interest rates. It reduces the monthly amount to pay and the total amount to be repaid. Similarly, a rise in interest rates may make one pay a higher monthly instalment than the current arrangement. It increases the overall amount to pay.
Bottom line
Term loans are loans that you must pay over a certain timeline. It splits into short and long-term loans. Short-term loans are ideal for critical emergencies and minimal cash needs. The loan term stays 6 months to 12 months on these loans. Alternatively, you may consider a long-term loan for future needs. It could be buying a home, a car, or remodelling an existing possessions. The blog describes the difference in detail. Now you can prefer the proper one for your needs
Roscoe Tanner
Roscoe Tanner is the Editor-in-Chief, leading a large team of writers at Versityloans . He has expertise in writing for various borrowing options like personal loans, long-term and short-term loans, unemployed loans and many more. Roscoe joined Versityloans in 2015 but previously worked with many reputed loan companies. He performs the major role as the editor, covering key aspects of loans and finance. Roscoe Tanner wants to serve at large in the progress of the company and to present a modern alternative to the traditional financial industry in the UK. He is a Certified Financial Planner and has a god-gift of connecting with people through his valuable suggestions and writings. His expertise as a writer and editor in the finance industry is based on his education qualification. Roscoe has done a Master of Business Administration (MBA) in Finance.
