Term loans can enable your business to finance large purchases you can pay off over time.
Term loans provide a convenient way to get the funds you need for a specific purchase. You receive the money upfront and then pay it back over a set term. These are commonly used to buy cars, homes, and even household appliances. But they can also help to fund business ventures and are offered by traditional and online lenders as well as the U.S. Small Business Association (SBA) for that very reason. So, could one work for you? Read on to learn the ins and out of term loans and how to choose the best one for your situation.
What is a term loan?
Term loans provide you with a lump sum upfront which is repaid, plus interest and fees, over a fixed period. They can range from short term loans with repayment periods of one year or less, to longer-term loans with repayment periods up to 10 years.
How do term loans work?
To get a term loan, you have to apply with a lender that’s a good fit for your situation (more on that below). Upon approval, they’ll send the loan amount to your bank account. Soon after, your repayments will begin. You’ll continue to be responsible for the repayments until the balance is repaid in full.
In many cases, you can opt to repay the loan early without prepayment penalties. However, it’s always good to check the fine print for fees before signing.
What are the types of term loans?
Term loans are available in a variety of situations and can be secured or unsecured.
Unsecured term loans
Unsecured term loans, like many personal and business loans, do not require you to provide collateral. Instead, you’ll need to meet the lender’s requirements regarding income and credit. After reviewing your financial situation, they’ll analyze the level of risk you present as a borrower.
Based on the risk analysis, they’ll approve or deny you. Further, they’ll decide how much you will need to pay in interest and fees. The better your credit, the lower your costs and the higher your likelihood of approval.
Secured term loans
Secured loans, like auto loans, mortgages, and larger business loans, require collateral. As a result, if you default on your repayments, the lender can repossess the collateral and sell it to cover the debt. This lowers their risk level.
As a result, it’s often easier to get approved for secured loans with less-than-great credit, and they can come with lower costs. However, it can take longer to inspect and approve your collateral, making the application process more complicated.
Term loan vs. line of credit: What’s the difference?
Trying to decide between a term loan and a line of credit?
The main factor to consider is if you need the full amount of money now or if you’ll use it over time. With a term loan, you get the full amount upfront and interest charges begin on the date of disbursement. Then, you make repayments on a fixed schedule until the balance is paid off.
With a line of credit, you are given access to a sum of money to draw from as needed. You only pay interest on the amount you withdraw. This can save you money if you don’t need the full amount or if you are going to use it over time.
A line of credit may be open-ended, where you are only required to make a minimum payment each month to stay current. Then, you can pay it down when you have the funds. On the other hand, it may have a draw period in which you can withdraw funds from the credit line. When the draw period ends, you enter a repayment period which is structured like a term loan.
The right choice for you depends on how you plan to spend the money.
What credit score do you need for a term loan?
You may be wondering if you can get a short term loan with bad credit. The short answer is maybe. Lenders require you to meet minimum eligibility requirements, typically including a minimum credit score, which varies from one company to the next.
What to look for in a term loan lender
When looking for a term loan lender, here are a few things to keep in mind.
Loan amount: What loan amounts does the lender offer? What are the minimum and maximum limits? Do they suit your needs?
Loan terms:What loan terms do they offer? Does the time frame fit your budget?
Loan type:Does the lender offer loans that match your borrowing purpose (business, auto, mortgage, personal, etc.)?
Interest rates:What interest rate range does the lender offer? Is it competitive? How does the rate they quote you compare to quotes from other lenders?
Collateral:Will collateral be required?
Fees: Does the lender charge any fees (origination, prepayment, etc.)?
Total cost: What is the total cost of the term loan, including interest and fees?
Credit score: Do you meet the minimum eligibility requirements set by the lender?
Payment amount: Is the quoted monthly payment within your budget?
Renewable loan terms: Are you able to renew the loan terms if needed? If so, will you need to re-apply?
Service quality: Read reviews from past borrowers to find out if others recommend the company. Find out if they have a reputation for fair prices and quality service.
By reviewing these factors, you can find the best term loan for your needs.