Term loans are a type of financing programs with a specific, pre-determined maturity date and are usually paid back through monthly or quarterly installments. At its maturity date, the term loan’s original principal balance and all interest accrued will have been paid off.
There are many variations of the term loan. The key element of the term loan, however, is the maturity date, which determines its loan term (or repayment period).
In contrast, many revolving loan accounts are more open-ended, with no maturity date. Revolving accounts typically give the borrower a line of credit, against which the borrower can draw funds. The borrower will then pay back all or a portion of the credit line used, according to the agreed-upon loan terms.
Strictly speaking, almost all types of home mortgages, automobile financing and various types of personal loans can be classified as term loans. However, the label “term loan” is used primarily in the business and commercial loan market.
As noted above, term loans typically have most, if not all, of the features found in a traditional loan:
Commercial banks typically have set guidelines for their term loan programs, with interest rates established by public indexes. However, some businesses may be able to negotiate on the loan features.
Most commercial banks, especially those serving local businesses, offer term loan programs. Businesses that qualify for and receive term loans typically use these funds to preserve their operating capital, while pursuing expansion, acquisitions or other investments.
Term loans are often used to finance the purchase of new equipment, facilitate a transfer of ownership or allow the borrowing company to acquire other businesses. Applications for commercial term loans are usually reviewed, underwritten and approved based on the qualifications of the borrowing company, including the borrower’s revenues and available assets.
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