What is a Term Loan?

Jessica Ellis
Jessica Ellis

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.

Businessman giving a thumbs-up
Businessman giving a thumbs-up

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.

Some student loans are essentially term loans. In the United States, the Stafford Loan is often offered to college students as a means of paying tuition and living expenses. This loan is unique in several ways, and can be very beneficial to students. Part of the loan may be subsidized, so that interest does not accrue while the student remains in school. Students are also typically given a six month grace period following graduation before beginning repayments.

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 principle 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 your will be more financially able to repay in the future, choosing 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.

Jessica Ellis
Jessica Ellis

With a B.A. in theater from UCLA and a graduate degree in screenwriting from the American Film Institute, Jessica is passionate about drama and film. She has many other interests, and enjoys learning and writing about a wide range of topics in her role as a wiseGEEK writer.

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Discussion Comments


What can increase the term of the loan?


Thanks a lot for this post. Definitely, this problem is urgent nowadays. If you have just graduated and found your first job and need to save every penny in order to manage the monthly payments for several student loans you possess, then the best available way of saving money for you is student loans. consolidation being a great option to save hundreds of dollars.


I have been searching for a student loan, but can only find adjustable rate loans. I am nervous about taking on a long-term loan with volatile interest rates. I have received the maximum grants and federal loans available, but I am still a little short. Does anyone know where I can look to find a fixed rate student loan?

I do not mind making interest only payments while I am still in school, but I cannot afford to make the full payments until I graduate (this rules out a personal loan). Honestly< I would rather make interest payments so my principle does not go up when I enter the repayment phase. I have decent credit and a co-signer...can anyone point me in the right direction?


@ Anon26076- Working capital is a company's current assets minus its current liabilities. A company that has working capital can easily pay off its short-term obligations. Working capital is one financial number used to determine the health of a company.

Working capital does relate to term loans indirectly. Some companies need to take out term loans to ensure efficient working capital. This is not necessarily because the company is in financial trouble. Some companies may only manufacture goods during a certain time of year, or season, but have overhead throughout the year. These types of companies will have to seek short-term and long-term loans to maintain profitable operations.


What is the difference between the term loan and working capital?

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