What Is a Term Loan and When Should You Get One?
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In recent years, around 35 percent of Americans have taken on a new loan. Americans have easier access to credit than ever. If you have a small business or you’re thinking about starting one, then you may be looking at your financing options. A loan might be the right choice. Now the question is, what kind of loan do you need? There are several different kinds of loan available. One of the most common is what’s known as a term loan. Just what is a term loan? Should you be considering one for your business or another reason? This guide has everything you need to know.
What is a Term Loan?
A term loan is one type of credit you can get from a bank or another lender. Generally speaking, this type of loan gets its name from the fact it has a certain repayment period. That repayment period is known as the term. There are a few different sub-types of term loans. Many people are familiar with the auto loan, which is a type of term loan. You borrow so much from a lender, then pay it back over a set period of time.
Other types of term loans include:
- Equipment loans
- Payday loans
- Personal loans
Term loans for cars often have lengthy terms, such as five or seven years. There are also short term loans, which may be paid back in under a year. Payday loans are a good example. The interest rate on a term loan varies. Some term loans offer fixed rates, which means you’ll pay the same interest rate over the entirety of the loan. Other loans will have a variable rate. That means the interest rate may go up and down over the term of the loan.
Term Loans versus Revolving Credit
Term loans are also sometimes called “fixed” loans because they offer a one-time fixed amount of credit. Credit cards and lines of credit are known as “revolving” credit. You can use what you need to from your account. As you pay the amount back, the credit becomes available to use again. When you pay back a term loan, you don’t have the option of using the funds again.
What Are the Advantages of a Term Loan?
Now that you know the term loan definition, you may be wondering about how they can help you. Term loans have a few benefits. First, they can help you get access to funding so you can make a purchase. If you need a new car to run your business, you may not have $20,000 or $30,000 kicking around to buy it outright. A term loan can help. Term loans can also help you finance the purchase of business equipment, such as a new computer or specialized machinery. They may also help if you need a large injection of cash for a project, such as a new website or product development.
A term loan may also help you manage between paychecks if you happen to be a little short. If you experience an emergency or are facing medical bills, then a term loan can help you make these payments more manageable. Next, you have the benefit of a steady payment over a predetermined amount of time. This can help businesses and individuals alike manage their payments. Unlike credit cards and lines of credit, you always know exactly what your monthly payment will be with a term loan.
Building Credit with a Term Loan
Another advantage of the term loan is that you can use it to build credit. If you don’t have a credit rating, then taking out a short term loan can help you create credit history for your file. That can help you build your rating. You may also want to consider a small personal loan to help recover from a bad rating. If you have poor or bad credit, then making small, regular payments can help.
Another advantage of term loans can be consolidating debt. If you have several small loans and credit cards, then it can be helpful to roll them together under one loan. By taking out the term loan, you can pay off these other credit products. You can then pay one fixed amount every month. This can help you better manage your finances because the payment is predictable.
Is a Term Loan the Right Choice?
For many situations, a term loan may be your best option. As we said, if you want to buy some special equipment or need an injection of cash for a special project, then a term loan is a good idea. In some cases, a term loan may not be the best choice available to you. If you’re looking for a business loan, for example, you may not be able to get loans for “small” amounts. Business term loans often start around $100,000 or more. If you’re seeking less, then you may want to consider a different financing option.
Term loans may also not be the best choice when it comes to ongoing expenses. If you’re looking to pay monthly bills, manage payroll, or even pay your rent, then a term loan may not help. In these scenarios, a revolving credit option is usually best. That credit can be repaid and used over and over again. A term loan, on the other hand, is a one-time injection of cash.
Getting a Term Loan
If you’ve decided a term loan is the best choice for you, you’re probably wondering how to get one. You’ll need to decide on an amount, then apply to a lender. Most people look to banks for loans, but there are many other options out there. If you’re looking for the best term loan, be sure to consider alternate lenders. Comparing loans, interest rates, and lenders is important.
Funding Your Business Success
You asked, “What is a term loan?” and now you have the answer. With this information in hand, you can choose the right financing options to help grow your business. Looking for more information about starting or running a small business? We have more advice, tips, and tricks just for you.