Term loans normally refer to the loan provided for financing of long term assets like Home, Car, House repairmen work etc. This does not allow the borrower to re-borrow any amount after repaying some part or full part of the loan. The term loan is the mostly widely used loan by the retail customers and banks earn high interest income on the same.
The interest rate can be either fixed or floating depending on the loan agreement between the bank and the borrower. For fixed interest rate on term loans, the interest rate is fixed for a certain period of time, after which the interest rate is re-visited. For floating interest rate term loans, the interest rate is linked to a benchmark interest rate like LIBOR or bank’s prime lending rate (PLR) and is updated based on the bench mark interest rates. Banks update their benchmark interest rate PLR, depending on the benchmark interest rates (Repo and Reserve Repo) set by the Central Bank.
The term loans can also be divided into 2 parts based on the tenure of the loan. These 2 types are
Short term loans are provided for shorter time duration to meet the short term liquidity requirement of the borrower. Also sometimes, borrowers prefer to take short term loans in order to reduce the total interest payment on the loan. Personal loans, 2 wheeler loans for shorter duration etc. are example of short term loans.
Long term loans are provided for longer duration like 5-20 years to meet the long term requirement of the borrower like buying a flat, car other fixed assets etc. The repayment schedule depends on the agreement between the borrower and banks but all the money is repaid at the end of the tenure. The interest rate can be floating or fixed.