Term loan

Term loan Meaning

The term loan is a type of loan in which repayment is made on a periodic installment basis which includes principals and interests that have a maturity period of more than 1 year but generally less than 10 years. It is a formal loan that means a loan arranged from formal negotiation with banks and financial institutions.

Formal negotiation includes a formal contract having required information and term and conditions like; maturity period, interest rate, collateral, and payment process along with the date. A series of payments are made periodically on this type of loan until the loan is fully amortized. Term loan funds are normally used for purchasing fixed assets or discharging other loans.

Term loans are advantageous for the firm because of lower cost than the cost of equity, lower processing cost, flexible negotiation, etc. Here we are going to analyze from the borrower’s perspective not via the lender perspective.