• A term loan is a monetary loan that is repaid

in regular payments over a set period of time.

Term loans usually last between one and ten
years, but may last as long as 30 years in some
cases. A term loan usually involves an
unfixed interest rate that will add additional
balance to be repaid.
• Usage
• Term loans can be given on an individual basis,
but are often used for small business loans. The
ability to repay over a long period of time is
attractive for new or expanding enterprises, as
the assumption is that they will increase
their profit over time. Term loans are a good way
of quickly increasing capital in order to raise a
business’ supply capabilities or range. For
instance, some new companies may use a term
loan to buy company vehicles or rent more space
for their operations.
• Consideration
• One thing to consider when getting a term loan is
whether the interest rate is fixed or floating. A fixed
interest rate means that the percentage of interest will
never increase, regardless of the financial market. Low-
interest periods are usually an excellent time to take
out a fixed rate loan. Floating interest rates will
fluctuate with the market, which can be good or bad
for you depending on what happens with the global
and national economy. Since some term loans last for
10 years, betting that the rate will stay consistently low
is a real risk.
• Also, consider whether the term loan you are
looking at uses compound interest. If it does, the
amount of interest will be periodically added to
the principal borrowed amount, meaning that the
interest keeps getting higher the longer the term
lasts. If the loan does use compound interest,
check to see if there are any penalties for early
repayment of the loan. If you get a windfall or
profits increase spectacularly, you may be able to
pay off your entire balance before it is due,
preventing you from paying additional interest by
waiting for the loan term to end.
• Some loaning institutions offer a variety of
repayment plans for your term loan. Commonly,
you may choose to pay off your debt in even
amounts, or the amount you pay will gradually
increase over the loan period. If you expect that
you will be more financially able to repay in the
future, causing an incremental increase may help
you and save you interest. If you are unsure of
your future monetary position, even payments
may help prevent defaulting on the loan if things
go badly.
• Choosing a term loan may be in your best
interest, depending on your circumstances.
Beware of extremely long repayment periods,
as generally speaking, the longer the term, the
more you will owe because the interest
accrues over a long period of time. For more
information, contact a financial advisor or
speak to your bank about loan options they
provide.