Understanding Term Loans: A Complete Guide

Aug 25, 2020

Understanding Term Loans: A Complete Guide

Borrowing money from conventional financial institutions like banks and NBFCs often seems the ideal way to deal with sudden cash flow shortages in business. In households too, individuals avail credit to purchase consumer durable goods, property, cars, etc. and meet many other purposes.

As per an Economic Times report, India’s retail loan market will hit Rs. 96 Trillion, ending the first quarter of 2024. At such a time where loans are becoming readily available, term loans can be a suitable funding option to fulfil your various financing needs.

But, before getting to that, have a better look at term loans to understand their meaning.

Term Loans and their Types

As a responsible borrower, you must be able to understand what term loans are, along with their various types. A term loan is nothing but a form of credit that relies on specific repayment tenure. Also, you must clear all dues for such a loan via regular monthly instalments or EMIs. The interest rates on these loans can be either fixed or floating.

Term loans are available to both corporate customers and households. Listed below are the three primary types of term loans that you can avail, depending on their length of repayment.

  • Short-term loan – These loans come with repayment tenure shorter than a year or two. The principal amount available through such loans can vary as per the specific type of loan you choose and on other factors. If you hold a poor credit rating, which prevents you from availing finance for an extended duration, short-term loans may be the best solution.
  • Intermediate-term loan – Intermediate-term loans refer to those credit types that allow two to five years for loan repayment. This slightly longer period can be crucial for new businesses to establish, before settling other dues.
  • Long-term loans – Here, the repayment schedule is considerable, ranging between 5 and 20 years. In some cases, tenure for a long-term loan may even extend up to 30 years. Generally, you need to provide collateral against loans with extended tenure. Businesses opting for a long-term credit can repay the same through quarterly or monthly instalments, as per their preference and financial backing.

Features of Term Loans

The following are some of the characteristics of term loans –

  • You can avail such loans with or without collateral. However, in the latter case, interest rates tend to be higher due to an increased risk to the lender.
  • You must repay these loans within the predetermined tenure, regardless of your financial condition.
  • Defaults in clearing monthly instalments can lead to penalties in the form of additional charges. However, the exact terms for such penalties can vary widely, depending on your lending institution.

You can also consider gold loans as a viable funding option when seeking term loans with short repayment tenures. It fuses the features of a short-term credit with the benefits of long-term loans, creating a financial product that is easy to avail and repay.

According to a KPMG report, as presented in Business Line, the gold loan market is expected to grow at a five-year CAGR of 13.4% until 2022. This highlights how gold loans are quickly becoming a top choice when it comes to secured term loans in India.

So, are gold loans really worth your time? Read on below to understand.

Reasons behind the Popularity of Gold Loans

Gold loans have become a popular financing option primarily due to the abundance of gold jewellery in almost every household in India. Additionally, the ease with which you can apply for such credits is also impressive. Here are some beneficial features of a gold loan –

  • Loan availing made easy

Gold loans come with a simple application process, followed by a quick approval. Rupeek Fintech Private Limited also provides the facility to avail gold loans at your doorstep. A loan manager from the lender visits your home to evaluate the pledged gold, after which your loan is approved and disbursed. All of this happens in less than 30 minutes.

Also, he/she will only leave with the pledged gold only when the gold loan amount reaches your bank account.

  • Reliable security for your pledged assets

Rupeek Fintech Private Limited takes special care to ensure safety for your pledged gold after you avail such a loan. During transportation of the asset, it is carried in a GPS-trackable bag. Plus, it is stored inside a secure vault at the nearest partner bank branch.

What do you do if the gold jewellery is damaged in the meanwhile?

While chances of such a thing happening are rare, Rupeek also offers a free of cost insurance policy to cover accidental losses to the pledged gold. In the event of damage or theft, you can claim and receive reimbursement for your losses.

  • Utilising low interest rates

Minimal interest rates on gold loans are another vital reason for their popularity. Regardless of whether you need the credit for business purposes or to fulfil any other need, low interest rates on these loans can significantly ease your repayment burden.

Due to the presence of collateral, such loans bear minimal risks for the lender, which allows them to extend financial assistance at low rates.

  • Tenure flexibility and easy repayment

Gold loans can be categorised as a short-term loan, with repayments ranging between 3 months and a year. Flexibility in choice of tenure thus allows you to repay the loan suitably.

Nevertheless, instead of sticking to a fixed repayment schedule, you can utilise a variety of repayment methods to clear your dues. Bullet payment technique from Rupeek, for instance, allows you to clear both principal and interest outstanding on credit at the end of loan tenure, instead of bearing monthly instalments. You can also choose to pay only interest during the tenure and defer the repayment of loan principal until the end.

  • High loan to value ratio

Gold loans also come with a high loan to value ratio or LTV. This ratio is a reflection of the percentage of gold’s value a lender is ready to provide as a loan. A high LTV thus means that you can raise considerable funding by pledging your gold ornaments. With the highest LTV on gold loan, Rupeek offers a high per gram value on your pledged gold.

  • No credit checks necessary

Unlike most term loans, a gold loan does not require you to have a high credit score. In fact, your CIBIL rating does not play any role in such lending since financing companies rarely check this aspect. Therefore, even if you hold less than ideal credit scores, gold loans are easy to avail if you possess the necessary jewellery.

These are some of the benefits of availing a gold loan and other types of term loans as well. Avail one as per your requirement while looking to mitigate your financial worries without any hassle.

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