Thursday, February 22, 2024
HomeFinanceTypes of term loan and its differences

Types of term loan and its differences

Term loans are a type of loan where the borrower receives a lump sum of money upfront and repays the loan over a set period of time with interest.

These loans are typically used to fund large capital expenditures, such as buying a home, starting a business, or purchasing equipment.

There are several types of term loans available to borrowers, each with its own unique features and benefits. In this article, we will discuss the different types of term loans and their differences.

  1. Installment Loans

Installment loans are a type of term loan where the borrower receives a lump sum of money upfront and repays the loan over a set period of time in equal installments.

These loans are often used to fund large purchases such as cars or appliances. The interest rates on installment loans can vary depending on the borrower’s credit score and other factors.

  1. Balloon Loans

Balloon loans are a type of term loan where the borrower makes small monthly payments for a set period of time, and then makes a large lump sum payment at the end of the loan term.

These loans are often used for business financing to fund large purchases or projects, and the large lump sum payment at the end of the term can be refinanced or paid off with the proceeds from the project.

  1. Bullet Loans

Bullet loans are a type of term loan where the borrower receives a lump sum of money upfront and repays the loan in a single payment at the end of the loan term.

These loans are often used by businesses to fund short-term projects or to cover expenses during a slow business period.

  1. Bridge Loans

Bridging loans are a type of term loan that provides short-term financing for businesses or individuals until long-term financing can be secured.

These loans are often used to bridge the gap between a business’s need for capital and the time it takes to secure long-term financing.

 Bridge loans typically have high interest rates and fees, but can be a valuable tool for businesses in need of immediate cash flow.

  1. Secured Loans

Secured loans are a type of term loan where the borrower puts up collateral, such as a home or car, to secure the loan.

These business loans typically have lower interest rates than unsecured loans because the lender has a lower risk of losing money if the borrower defaults on the loan.

  1. Unsecured Loans

Unsecured loans are a type of term loan where the borrower does not put up any collateral to secure the loan.

 These loans typically have higher interest rates than secured loans because the lender has a higher risk of losing money if the borrower defaults on the loan.

  1. Equipment Loans

Equipment loans are a type of term loan that are specifically designed to help businesses purchase or lease equipment.

These loans can be secured or unsecured and often have lower interest rates than other types of term loans because the equipment itself serves as collateral.

  1. Small Business Administration (SBA) Loans

SBA loans are a type of term loan that are backed by the Small Business Administration.

These loans are designed to help small businesses for their capital loan and can be used for a variety of purposes, including working capital, purchasing equipment, and refinancing debt.

SBA loans typically have lower interest rates and longer repayment terms than other types of term loans.

  1. Revolving Credit Loans

Revolving credit loans are a type of term loan where the borrower has access to a set amount of credit that can be drawn upon as needed.

These loans can be secured or unsecured and typically have higher interest rates than other types of term loans because of the flexibility they offer.

  • Letter of Credit Loans

Letter of credit loans are a type of term loan that are used in international trade. These loans provide a guarantee to the seller that they will be paid if they fulfill the terms of the sale. The buyer typically pays a fee for the letter of credit, which is issued by a bank.

Differences on types of term loan

Each type of term loan has its own unique characteristics and differences that make it more suitable for specific financial needs. Here are some of the key differences between the various types of term loans:

  1. Repayment Structure

The repayment structure of each type of term loan varies. For example, installment loans require equal monthly payments over the loan term, while balloon loans require small payments throughout the loan term and a larger payment at the end.

 Bullet loans require a single payment at the end of the term, and revolving credit loans have a variable repayment schedule.

  1. Interest Rates

The interest rates on term loans can vary depending on the type of loan and the borrower’s creditworthiness.

Secured loans, where the borrower puts up collateral, typically have lower interest rates than unsecured loans.

Balloon loans and bridge loans may have higher interest rates due to their short-term nature and higher risk.

  1. Loan Amount

 The amount of money that can be borrowed through each type of term loan varies. Equipment loans are typically designed for specific purchases, while SBA loans may offer larger amounts for more general business expenses. Revolving credit loans offer a set credit limit that can be drawn upon as needed.

  1. Loan Term

 The length of the loan term can also vary depending on the type of loan. Installment loans and SBA loans may offer longer repayment terms, while balloon loans and bridge loans typically have shorter terms.

  1. Collateral Requirements

Some types of term loans, such as secured loans, require collateral to be put up to secure the loan.

 Other loans, such as unsecured loans, may not require collateral but may have higher interest rates.

  1. Purpose of Loan

Each type of term loan is designed for a specific purpose. Equipment loans are designed for the purchase of equipment, while bridge loans are designed to provide short-term financing until long-term financing can be secured.

  1. Application Process

 The application process for each type of term loan may vary. SBA loans, for example, may require more documentation and a longer application process than other types of loans.

  1. Eligibility Requirements

Each type of term loan may have different eligibility requirements for borrowers. For example, SBA loans are only available to small businesses that meet specific size and revenue criteria.

Equipment loans may require the borrower to have a specific credit score or a certain level of business income.

  1. Prepayment Penalties

Some term loans may include prepayment penalties if the borrower pays off the loan early. This is because the lender may lose out on the interest that would have been paid if the loan was paid off over the entire term.

It’s important to understand whether a loan includes prepayment penalties and how they are calculated.

  • Fees and Charges

 Borrowers should be aware of any fees or charges associated with their term loan. These can include application fees, origination fees, processing fees, and other charges.

It’s important to understand how these fees are calculated and how they will affect the overall cost of the loan.

  • Risk Level

 Each type of term loan has a different level of risk associated with it. For example, unsecured loans may be riskier for the lender because they don’t have collateral to fall back on if the borrower defaults on the loan.

Secured loans, on the other hand, may be less risky because the lender has collateral to seize in the event of default.

  • Lender Requirements

Different lenders may have different requirements for each type of term loan. For example, some lenders may require a minimum credit score or a certain level of business revenue.

It’s important to research different lenders and their requirements before applying for a loan.

Final words

There are several types of term loans available to borrowers, each with its own unique features and benefits.

When deciding which type of term loan to apply for, it is important to consider factors such as the loan amount, interest rate, loan term, and collateral requirements.

 By doing your research and understanding the differences between each type of term loan, you can make an informed decision that will help you achieve your financial goals.

RELATED ARTICLES

Latest Post