Term Loans 101: How To Know Which One Is The Best For You?


You want to borrow a loan but aren’t sure which one is the best for you? Or,  you are confused with the different tenures and rates of interest. Congratulations! You found your destination. Here’s the simplified guide on the short term medium term and long term loans you were looking for.

As you might already know, a term loan is a loan from a bank for a specific amount that has a specified repayment schedule and has a fixed or floating rate of interest. It is appropriate for an established small business with sound financial statements. It may also require a substantial down payment to reduce the payment amounts and the total cost of the loan.

Types of Term Loans

Term loans can be classified into three types – short-term, medium-term, and long-term loans.

Short Term Loans

They are obtained to support a temporary personal or business capital need. As it is a type of credit, they involve repaying the principal amount with interest by a given due date. The date is usually within a year from the day of getting the loan.

They can prove to be a valuable option, especially for small businesses or start-ups that are not yet eligible for a credit line from a bank. Short-term loans are suitable not only for businesses but also for the common people who find themselves in a temporary, sudden cash flow issue.

Short-term loans need to be paid off quickly. In most cases, they must be paid off within six months to a year or at most, 18 months.

Medium-Term Loans

Whether you have a goal to own a small business or have already launched your company, you likely need financing of some sort to reach your desired destination. They are best suited for growing, revenue-positive businesses with a need for capital to further expand. You can use the cash to buy inventory and supplies, open a new location, or hire more talent.

Mostly, these loans have a monthly or bi-monthly payment schedule, and mid-market interest rates.

Long Term Loans

They are the most popular in the financial industry. Car loans, home loans, and certain personal loans fall under the category of long-term loans. They are availed to meet business or personal needs. They also have a lower rate of interest.

Long-term loans offer a hefty loan amount and have a longer repayment tenure. The period can be anywhere between 3-30 years.

They are sanctioned based on the regular income of an applicant and generally require a continuous source of income as well as collateral to be submitted with the lending bank.

In conclusion, the choice of loan, short-term, medium-term, and long-term loan, totally depends upon your urgency and the amount you want to avail. Happy banking!