Term loans are referred to loan facilities having specific repayment tenures. In case of personal loans, term loans are loans offered by lenders for specific repayment tenures at fixed or floating rates of interest. Personal loans offered in the form of term loans can be further classified on the basis of tenure, type of interest rates, etc.
According to the Type of Interest Rates
- Fixed Rates: Fixed rate personal loans remain fixed throughout the loan tenure, irrespective of the changes in the repo rate. The fixed interest rates are slightly higher than the floating rates. However, the individuals availing personal loans at fixed interest rates have higher certainty in financial planning as their EMI outflows would not get impacted by the changes in interest rate regimes.
|Lenders||Rate of Interest (p.a.)|
|HDFC Bank||10.50% onwards|
|ICICI Bank||10.50% onwards|
|Tata Capital||10.99% onwards|
|Axis Bank||10.25% onwards|
- Floating Rates: Personal loans offered at floating rates are subject to periodic changes as per the changes in the repo rate or other external benchmarks used by the respective lenders. The changes in their interest rates would depend on the reset date set for the borrowers.
|Lenders||Rate of Interest (p.a.)|
|Bank of Baroda||9.15%-16.50%|
|Union Bank of India||9.80%-13.90%|
|Punjab National Bank||8.80%-15.35%|
|Punjab & Sind Bank||10.40%-12.40%|
|Bank of Maharashtra||10.35%-13.70%|
According to the Loan Tenure
- Long Term Personal Loans: These loans are offered for tenures of more than 1 year with no end-usage restriction. Due to its longer repayment tenure, the applicants availing long term loans have to pay lower EMIs, which in turn reduces their EMI/NMI ratio and hence increases the chances of timely loan repayments. However, the interest cost incurred over the loan tenure is higher.
- Short Term Loans: Short term personal loans are usually referred to personal loans offered for tenures of 1 year or less. Shorter tenures result in lower interest cost but higher EMIs. Hence, these loans are ideal for those seeking lower loan amounts. Lenders offering short term personal loans usually uses digital channels, which result in quicker loan disbursal to the applicants.
Small Ticket Personal Loans
Small ticket personal loans are the loans offered for loan amounts of Rs 1 lakh or less. Such loans are also known as small loans or low-value personal loans. Major lenders usually offer personal loans for loan amounts starting from Rs 1 lakh. Therefore, consumers have to approach micro finance companies for such smaller loan amounts. But, with new-age fintech platforms and NBFCs, the consumers can now avail small ticket personal loans for loan amounts as low as Rs 1,000.
Frequently Asked Questions
Many people have a lot of questions about term loans. Some of the frequently asked questions about both short-term and long-term loans are answered here.
Q: Which one is preferable: short-term loan or long-term loan?
A: Long-term loans usually come at a lower interest rate and EMI as compared to a short-term loan. Long-term loans also tend to put less stress or pressure on the borrower to pay back the loan. But, you must go for the type of term loan that suits your needs instead of considering the external factors. Sometimes, a short-term loan can be your best bet to meet your immediate capital needs. Long-term loans have tenures of 3 years or more while the short-term loans have tenure of 1-2 years. Generally only loans with tenures of 12 months or lower are considered to be short-term loans.
Q: Are long-term loans sanctioned to individuals or businesses?
A: Long-term loans are sanctioned to individuals as well as businesses or companies. Private lenders and banks both approve term loans – long-term or short-term, for individual and corporate applicants. The terms and conditions vary slightly from one lender to another.
Q: I have a bad credit history. Am I still eligible for a term loan?
A: You can apply for a term loan. However, banks and financial institutions do not lend money to people with poor credit history. You need to check with a few banks to find out if they consider applicants with a bad credit history. In most of the cases, they levy relatively high rate of interest on term loans to people with a bad credit score. The other option is to consider a secured loan. Even a small secured loan can help you improve your credit score significantly.
However, if you have a poor credit rating and secured loans are not an option, it is best to not think of taking out or even applying for more credit. Every time your application is processed, it is a hit on your credit report. Multiple failed applications within a short span on time in addition to outstanding credit will raise more than one red flag. Simply put, if your credit is bad, improve it before you consider applying for new credit. You are entitled to obtain one free credit report from CIBIL every year, and more for a fee. If you have not checked your own credit score recently, this report will help you know which debts are having the worst effect on your rating and address them accordingly.
Q: What is the interest rate for short-term loans?
A: The interest rate for short-term loans can be anywhere from 12% to 20% per annum. The actual interest rate is set at the time of the loan approval considering the type of loan, principal amount, tenure, and repayment capacity of the applicant. The interest rate for short-term loans is usually higher than that of long-term loans.
Q: Should I opt for a floating or fixed interest rate for my term loan?
A: A floating interest rate keeps on changing during the loan tenure due to fluctuations in the market conditions. If it goes down, the borrower has to pay less interest than he would have if he had borrowed the loan at a fixed interest rate. Conversely, if it goes up, the borrower has to pay more interest than if he had opted for a fixed rate of interest. It is advisable to take chances with a floating interest rate if the borrower is going for a short-term loan. This way, even if the interest rate increases, the borrower will not be impacted for a long time. For a long-term loan, even with the cyclical nature of floating rates, it is difficult to predict within an acceptable margin of error what the interest rate will be in the future. Therefore, borrowers are advised to opt for a floating interest rate for a short-term loan and a fixed interest rate for a long-term loan.
Q: I need to purchase a house. Which term loan should I go for?
A: A home loan is the best option for most property buyers. However, if you want to sell a property and then use the funds to buy a new property, you can go for a bridge loan. A bridge loan is a short-term loan that can help you buy a new property until you find a suitable buyer for the existing property.
Q: Can I get a term loan to expand my business?
A: Yes, you can get a term loan to expand your business. If you want to borrow a large sum of money under the term loan, you must consider a long-term loan like a Loan Against Property (Commercial). You will be able to get a lower interest rate on the loan and repay the loan in easy EMIs. If you only need a small amount, consider one of the many short-term commercial loan offerings from various banks.