Term Loans in India: Key Features and Different Types

Understanding Term Loans

A term loan is the borrowed money that is repaid in regular payments over a fixed period. These loans are typically divided into two categories: short-term personal loans and long-term personal loans, depending on the repayment tenure. They cater to diverse financial needs.

In a term loan,  the borrower agrees to pay back the principal amount along with interest by a specific date, which can be calculated using a term loan EMI calculator. This tool is invaluable for planning and managing financial obligations, ensuring borrowers can assess their repayment schedules accurately.

For individuals seeking immediate financial assistance without the burden of prolonged debt, a short-term personal loan offers a viable solution. On the other hand, long-term personal loans are suited for those requiring substantial funds, with repayment periods extending over several years. Moreover, the rise of digital lending platforms has simplified the process of obtaining a 5 lakh personal loan, making substantial sums more accessible to the average borrower.

How Do Term Loans Work?

If you’re someone who is wondering what is term loan, the simplest answer is that it’s a loan provided by financial institutions with a set repayment schedule and either a fixed or variable interest rate. Term loans are designed to meet the different funding needs of individuals and businesses. 

Term loans are divided into short-term and long-term personal loans to match the different needs of borrowers. This way, people can choose a loan that best fits their situation. For instance, a 5 lakh personal loan might be needed for urgent expenses such as medical emergencies or short-term business needs, fitting well within the short-term loan spectrum. On the other hand, long-term personal loans are more suited for significant expenditures like purchasing a home or investing in business expansion, offering longer repayment periods and potentially lower interest rates.

Different Types of Term Loans Available in India

Understanding the types of term loan available is crucial for borrowers to make informed decisions. Essentially, term loans in India can be broadly classified into short-term personal loans and long-term personal loans, each designed for specific purposes.

Short-term personal loans are typically used for immediate financial needs, such as emergency expenses or small-scale investments. They usually have a tenure of less than a year. Long-term personal loans are designed for more significant financial undertakings, such as purchasing a home or funding higher education. They have a longer repayment period, often extending beyond a year, providing borrowers with a longer timeframe to manage their finances.

Secured vs. Unsecured Term Loans

When it comes to term loans, understanding the difference between secured and unsecured loans is essential for borrowers. This knowledge helps them make informed decisions that align with their financial situation and goals. Here’s a straightforward comparison of secured and unsecured term loans.

Features and Benefits of Term Loans in India

The features and benefits of term loans in India are manifold, offering a range of financial solutions. Here’s a list of the most significant advantages of term loans:

Flexibility in Loan Types: Whether it’s a short-term personal loan for immediate financial needs or a long-term personal loan for significant investments, term loans offer flexibility to suit various financial circumstances.

Accessibility of Funds: Term loans provide quick access to funds, which is particularly beneficial for urgent financial requirements, such as a 5 lakh personal loan for emergency expenses.

Variety of Interest Rates: With options for fixed or floating interest rates, borrowers can choose the most suitable one based on their financial stability and market conditions.

Collateral Requirements: The distinction between secured and unsecured loans allows borrowers to opt for a term loan without collateral if they do not wish to pledge assets or secure a loan with collateral for potentially lower interest rates.

Repayment Flexibility: Term loans often come with flexible repayment options, allowing borrowers to choose a tenure that matches their repayment capacity, which is crucial for managing financial health over time.

Eligibility Criteria for Term Loans

The eligibility criteria for term loans in India are designed to assess a borrower’s ability to repay the loan. These criteria vary by lender but generally include several key factors that applicants must satisfy. 

Credit Score: A good credit score is often the foremost criterion, reflecting the borrower’s creditworthiness and repayment history. It’s a critical factor for lenders to assess the risk associated with lending.

Income Level: Regular and stable income ensures lenders that the borrower has the ability to repay the loan. The income requirement can differ depending on the loan amount and type.

Employment Stability: For salaried individuals, stable employment with a reputable organization is often a requirement. For self-employed individuals, lenders look at the stability and profitability of the business.

Age: There’s usually a minimum and maximum age limit for eligibility, which can vary depending on the type of term loan. This ensures that the borrower is legally competent to enter into a loan agreement and is likely to repay the loan within the tenure.

Collateral: For secured loans, the value and acceptability of collateral play a significant role. Unsecured loans, while not requiring collateral, can have stricter criteria regarding credit score and income levels.

Debt-to-Income Ratio: This ratio evaluates how much of the borrower’s income is going towards debt repayment, including the potential term loan. A lower ratio indicates a higher capacity to take on new debt.

Factors that Affect the Eligibility of Term Loans

Several factors can significantly impact the eligibility for term loans in India, influencing both the approval process and the terms of the loan itself. Understanding these factors is crucial for potential borrowers to enhance their chances of securing a term loan.

Existing Debt Obligations: The borrower’s existing debt, including credit card debt, other loans, and liabilities, can affect eligibility. A high debt-to-income ratio may lead to loan rejection or higher interest rates.

Age: Age plays an important role, with most lenders setting minimum and maximum age limits for loan eligibility. This ensures that the borrower can reasonably repay the loan within the fixed period. Usually, the borrower needs to be at least 18 years old to secure the loan. 

Income and Employment Stability: A steady income from a stable job or a profitable business assures lenders of the borrower’s ability to repay the loan. Fluctuations in income or employment can raise concerns about repayment capabilities.

Collateral Value: For secured loans, the value and type of collateral can influence loan eligibility and terms. High-value collateral can lead to better loan terms, including lower interest rates.

Credit Score: A high credit score is a testament to a borrower’s financial responsibility and repayment history. Lenders favour applicants with good credit scores, as it reduces the risk of default.

Loan Amount and Tenure: The requested loan amount and chosen repayment tenure can also impact eligibility. Lenders evaluate if the loan amount is justified based on the borrower’s financial situation and if the repayment tenure aligns with the borrower’s age and income stability.

Documents Required for Term Loan Application

Applying for a term loan in India involves submitting several important documents that lenders require to process and approve the loan. These documents play a crucial role in verifying the borrower’s identity, income, employment, and creditworthiness.

Identity Proof: A government-issued ID such as a PAN card, Aadhaar card, Passport, or Driving License serves as proof of identity.

Address Proof: Documents like recent utility bills, Aadhaar card, or Passport verify the applicant’s current residential address.

Income Proof: For salaried individuals, recent salary slips, Form 16, and bank statements are needed. Self-employed applicants may need to provide income tax returns, profit and loss statements, and business bank statements.

Employment Proof: Salaried individuals should provide an employment certificate or ID card, while self-employed individuals might need to show business registration documents.

Credit Score Documentation: Although not always directly submitted by the applicant, being aware of one’s credit score and having documents or reports that reflect this can be beneficial.

Property Documents: In the case of secured loans, documents related to the collateral (property or other assets) will be required.

Interest Rates and Repayment Terms

When it comes to personal loans, interest rates and repayment terms can vary widely based on several factors.

Credit Score: Generally, a higher credit score can result in lower interest rates, as it indicates a lower risk to the lender.

Income and Employment Stability: Steady income and stable employment history can positively influence the interest rate offered.

Loan Amount and Term: Larger loan amounts and longer repayment terms can sometimes attract lower interest rates.

Type of Loan: Secured loans typically have lower interest rates compared to unsecured loans due to the presence of collateral.

Lender Variability: Different lenders offer varying terms and interest rates based on their lending policies, risk assessment, and market conditions. It’s important for borrowers to shop around and compare offers from multiple lenders to find the best terms that suit their financial situation.

Short-term vs. Long-term Personal Loans:

Short-term Personal Loans: These are typically for smaller amounts and shorter durations. They can be suitable for immediate financial needs but often come with higher interest rates.

Long-term Personal Loans: These loans are for larger amounts and have longer repayment periods. They usually offer lower interest rates, making them suitable for significant financial commitments.

What are the Monthly Instalments of a Term Loan?

Monthly installments, also known as Equated Monthly Installments (EMIs), are fixed payments made by the borrower to the lender at a specified date each month. These payments are used to repay both the principal amount and the interest on the loan over a set period. The amount of the EMI depends on the loan amount, the interest rate charged by the lender, and the tenure of the loan.

Loan Amount: The higher the loan amount, the higher the EMI.

Interest Rate: The higher the interest rate, the higher the EMI.

Loan Tenure: The longer the loan tenure, the lower the EMI.

For term loans, the monthly installment can be higher for a short-term loan compared to a long-term loan, as the borrowed amount is spread over fewer months.

If you’re looking for an unsecured loan of up to 5 lakhs with flexible personal loan repayment options, consider Zype. You can borrow the funds you need and choose to pay back in 6, 9, or 12 EMIs.

Here’s an example of the EMI structure for a loan amount of ₹1,00,000 at an annual interest rate of 18%:

Also Read: Installment Loans: Know what is it And How Do it Work

How to Apply for a Term Loan Online?

Applying for a term loan online has become a straightforward and efficient process, allowing borrowers to secure financial assistance with ease. Here’s a step-by-step guide on how to apply for a term loan online:

Research and Compare: Start by researching various lenders to find the best term loan options that suit your needs. Consider types of term loans, interest rates, repayment terms, and eligibility criteria. Tools like a term loan EMI calculator can help you compare different loan offers based on monthly instalment amounts.

Choose the Loan Type: Decide whether you need a short-term personal loan for immediate financial needs or a long-term personal loan for more significant expenses.

Check Eligibility: Before applying, make sure you satisfy the lender’s eligibility criteria for the chosen term loan. This typically involves age, income, employment status, and credit score requirements.

Gather Required Documents: Prepare all necessary documents, including identity proof, address proof, income proof, and any other documents the lender requires. Having these documents ready can speed up the application process.

Apply Online: Visit the lender’s website or download apps like Zype on your mobile and then visit the loan application section. Fill out the application form with valid information about yourself, your financial status, and the loan you’re applying for.

Submit Application: After filling out the application form, upload the required documents and submit your application. Some lenders may offer instant approval, while others might take a few days to process your application.

Loan Approval and Disbursal: Once your loan application is approved, the lender will typically disburse the loan amount directly to your bank account. The time taken for loan disbursal can vary depending on the lender.

Conclusion

The main idea of a term loan is that it can be customized to fit what the borrower needs. This means it can offer short-term loans for quick cash needs and long-term loans for bigger financial goals. In India’s evolving economic landscape, being informed about the types of term loan available, alongside their respective eligibility criteria, interest rates, and repayment structures, empowers individuals to make decisions that align with their financial goals.