A term loan is a monetary

loan In finance, a loan is the tender of money by one party to another with an agreement to pay it back. The recipient, or borrower, incurs a debt and is usually required to pay interest for the use of the money. The document evidencing the deb ...

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. A term loan involves paying

interest In finance and economics, interest is payment from a debtor or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (that is, the amount borrowed), at a particular rate. It is distinct f ...

with the interest amount being added to the amount that needs to be repaid. The interest rate which could fixed or floating is often based on the borrower's credit rating and when floating is often based on a benchmark rate such as EURIBOR,

SOFR Secured Overnight Financing Rate (SOFR) is a secured overnight rate, overnight interest rate. SOFR is a reference rate (that is, a rate used by parties in commercial contracts that is outside their direct control) established as an alternative to L ...

or a similar benchmark rate. Term loans are normally business loans and are in contrast to a

line of credit A line of credit is a credit facility extended by a bank or other financial institution to a government, business or individual customer that enables the customer to draw on the facility when the customer needs funds. A financial institution ...

or short term demand loans. The ability to repay over a long period of time can be attractive for new or expanding enterprises, as the assumption is that they will increase their

profit Profit may refer to: Business and law * Profit (accounting), the difference between the purchase price and the costs of bringing to market * Profit (economics), normal profit and economic profit * Profit (real property), a nonpossessory inter ...

over time thus being able to repay the loan. Term loans are a way for a business to quickly increase capital in order to raise a business’ supply capabilities or range. For instance, a new companies may use a term loan to buy a company vehicles or rent more space for their operations. Term loans may be raised in issuance to a borrower in the form of bank-syndicated debt, or the institution market. Institutional Term Loans, or rather those that trade on secondary exchanges are commonly referred to as "Term Loan B". These facilities are typically 7 years and lack financial covenants. In US law-governed loan transactions, they are considered senior debt and usually not subordinated to other indebtedness.

Considerations

The cost of the loan is the interest rate which can be fixed or floating. A fixed interest rate means that the percentage of interest will never increase, regardless of the financial market. Floating interest rates will fluctuate with the market, which can be good or bad depending on what happens with the global and national economy. Since some term loans last for 10 years or more the interest rate is an important risk consideration for both borrower and lender. Most term loans will use

compound interest Compound interest is interest accumulated from a principal sum and previously accumulated interest. It is the result of reinvesting or retaining interest that would otherwise be paid out, or of the accumulation of debts from a borrower. Compo ...

. If it does, the amount of interest will be periodically added to the principal borrowed amount, meaning that the interest keeps getting bigger the longer the term lasts. Although the term is fixed, the borrower may be able to repay it early in full, but there may be penalties for early repayment of the loan. Some lending institutions offer a variety of repayment plans for a term loan. Commonly, the loan is structured to pay off the debt in even amounts. However it may be structured so that payment gradually increase over the loan period or step up over time. This may be advantageous, if the borrower considers that it will be in better position to repay the loan in the future, but this would increase the interest amount and increases the risk for the lender. Even payments tend to help prevent a default on the loan.

References

{{reflist Loans Financial law

Considerations

See also

References