Loans touch many parts of life, whether it’s for buying your first home, expanding your business, or handling unexpected expenses. But often, the biggest challenge isn’t just getting the loan; it’s understanding how it works and what makes one loan better suited to your situation than another.
Imagine you’re planning a major purchase or investment. Do you prefer predictable monthly payments that make budgeting straightforward, or are you more interested in flexible repayment terms that can adjust to your changing income? Term loans can offer both options, depending on your needs. By understanding how they work, you can choose the right loan structure to keep your finances on track, whether you're seeking consistency or the flexibility to match your cash flow.
In this article, we will learn about term loans, from what they are and how they work, to the different kinds available and how you can qualify for them.
What is a Term Loan?
A term loan is a loan where you get all the money at once from a bank or lender. You pay it back over time through fixed monthly payments, called EMIs. Each EMI includes part of the loan and some interest. The time to repay is decided in advance. It could be as short as one year or as long as 20 to 25 years, depending on the agreement.
Features of Term Loans
Term loans can have fixed or variable interest rates. The repayment schedule is planned. Here are the main features of a term loan:
- Fixed or Variable Interest Rates: You can choose between a fixed or variable interest rate. A fixed rate stays the same throughout the loan, so your payments won’t change. A variable rate can go up or down over time, depending on the market.
- Easy Monthly Payments (EMIs): You repay the loan in equal monthly installments. This helps you plan your budget and manage your money better.
- Higher Loan Amounts: Term loans usually let you borrow more money than short-term loans. This makes them useful for big expenses like buying property, machinery, or growing a business.
- Loans for Specific Needs: These loans are often designed for specific goals, like buying equipment, funding a project, or renovating a home. This helps ensure the money is used correctly and may give you better loan terms.
- May Need Collateral: For larger or longer loans, you might have to offer something valuable, like property or equipment, as security. This protects the lender and may help you get a better interest rate.
- Flexible Repayment Options: You can choose how long you want to take to repay the loan. It could be a few years or many, depending on what works best for your financial situation.
Now that you know what a term loan is, let’s learn a little more about it in detail. As term loans come in different shapes and sizes, each is designed to meet specific financial needs and repayment capabilities.
Types of Term Loans
Depending on how long you need the funds and what you’re using them for, term loans come in different formats. Each type offers unique repayment timelines and benefits tailored to specific financial goals.
1. Short-Term Loans
Short-term loans are a type of borrowing that helps you cover immediate or temporary financial needs. These loans typically come with a repayment period of up to one year, and in some cases, slightly longer, stretching to around two years.
Because they’re designed for quick repayment, short-term loans are usually easier to qualify for and are disbursed faster than long-term financing. However, they often carry higher interest rates and offer smaller loan amounts.
Key Features:
- Quick approval and disbursement
- Typically higher interest rates
- Often unsecured and limited to lower loan amounts
Best For:
- Individuals handling urgent expenses, like medical bills or urgent repairs
- Freelancers or gig workers managing income gaps
- Small businesses that need working capital to cover day-to-day operations
Also Read: Short Term Loans and Advances: Definitions, Differences, and Types
2. Intermediate-Term Loans
Intermediate-term loans are a popular choice for businesses in India. They’re great when you need money for more than a short time but don’t want a long-term loan. These loans help businesses buy equipment, expand, or cover other big expenses. They fit well between short-term needs and long-term projects.
These loans often require regular monthly repayments and may be secured by collateral depending on the amount and lender policies. Interest rates are usually moderate, reflecting the balanced loan duration.
Key Features:
- Repayment period of 1 to 5 years, with most loans lasting between 2 and 5 years.
- Monthly installment payments (EMIs)
- May require collateral or security
- You can often borrow between ₹25 lakhs and ₹5 crores. It depends on your business and the lender’s rules.
Best For:
- Business investments like new equipment or service expansion
- Individuals funding education, home renovations, or debt consolidation
- Startups needing capital without a long-term loan commitment
3. Long-Term Loans
Long-term loans are for when you need to borrow a large amount of money and want to pay it back over many years. These loans usually last 3 to 30 years, depending on the type and the lender. People and businesses use them to buy homes, vehicles, or grow their businesses.
Both banks and non-banking financial companies (NBFCs) offer these loans. Most big loans need collateral, like property or a vehicle, but some smaller ones don’t.
Key Features:
- The repayment period varies according to the loan you have taken. For example, home loans are usually 10 to 30 years, vehicle loans are about 3 to 7 years, etc.
- Usually secured by collateral
- Lower monthly payments, but higher total interest costs
Best For:
- Buying or renovating a home
- Buying cars, bikes, or commercial vehicles
- Paying for higher education, in India or abroad
- Starting or growing a business
- Big personal expenses like medical bills, weddings, or consolidating debt
For India, where “loans” are always considered taboo, but when used wisely, they can be a smart step towards financial growth.
Benefits of Term Loans
Term loans have many benefits that make them useful for both personal and business needs. Their structured repayment plans and flexible terms are some of the main reasons people choose them.
Here are the key advantages of term loans:
- Predictable Payments: Term loans have fixed repayment periods and equal monthly payments (EMIs). This makes it easy for borrowers to budget since the amount they pay each month stays the same throughout the loan.
- Flexible Use: You can use the money from a term loan for many purposes. Whether it’s for urgent personal needs like medical bills or repairs, important business investments like buying equipment or expanding, or purchasing expensive things like a house or car, term loans are adaptable.
- No Ownership Loss: Unlike equity financing, where you give away part of your business ownership, term loans are borrowed money that you repay over time. Meaning you won’t lose control or ownership of your assets.
- Cost-Effective: Term loans can be cheaper than other types of borrowing, especially long-term loans with lower interest rates. This helps reduce the overall cost of borrowing compared to options like credit cards.
- Tax Benefits: Some term loans, especially long-term ones like home or education loans, offer tax deductions. For example, home loan borrowers in India can get tax breaks on the money they pay back, saving them more money.
- Flexible Terms: You can choose loan durations and repayment options that fit your budget. Terms can range from a few months to several years, making monthly payments easier to handle. Many lenders also allow you to pay off the loan early or make partial payments without penalties.
Also Read: Differences, Meanings, and Types of Loans and Advances in Banking
Now, before you apply for a term loan, let’s walk through the eligibility criteria and the type of loans that suit you according to the situation.
What are the Eligibility Criteria for Term Loans?
Before lenders approve a term loan, they assess your ability to repay, not just your need to borrow.
| Loan Type | Loan Tenure | Typical Purpose | Eligibility Criteria |
|---|---|---|---|
| Short-Term Loan | Up to 1 year | Working capital, urgent expenses, inventory, etc. |
- Age: 21–60 years (individuals) - Business or salary proof - Minimum credit score (usually 650+) - Income proof or cash flow statements - Business vintage (1–2 years, if applicable) |
| Intermediate-Term Loan | 1 to 5 years | Equipment purchase, business expansion, and personal goals like higher education |
- Age: 21–60 years - Stable income or operational business - Credit score 680+ recommended - Income tax returns (2–3 years) - Business plan (for business loans) |
| Long-Term Loan | 5 to 30 years | Home loans, large capital investments, and infrastructure |
- Age: 21–65 years (loan must end before retirement age) - Strong credit history (700+ preferred) - High repayment capacity - Detailed financial documentation - Collateral may be required |
You have figured out the criteria, the purpose, and what details are needed. Now let's look into the steps on how to apply for a term loan.
Application Process for Term Loans
Applying for a term loan might seem overwhelming, but it’s a straightforward journey when broken down step by step. Here’s what the typical application process looks like from start to finish.
Step 1. Find the Right Lender
Start by exploring banks, NBFCs, and online loan platforms. Compare interest rates, loan tenures, processing fees, prepayment charges, and eligibility criteria. Look into customer reviews and turnaround times too, it’s not just about the cheapest option, but also the smoothest experience.
Step 2. Gather Required Documentation
Prepare all the documents typically needed for term loan processing:
- KYC documents: Aadhaar, PAN, passport, etc.
- Income proof: Salary slips, Form 16, ITRs, business income proof (if self-employed)
- Bank statements: Usually for the last 6 months
- Ownership/asset documents: For secured loans (property papers, vehicle RC, etc.)
Having everything upfront speeds up the approval process.
Step 3. Submit the Loan Application
Fill in the application, either online or at the branch, with accurate details:
- Personal information
- Employment or business data
- Income details
- Loan amount and tenure
- Purpose of the loan
Some lenders offer instant approval if you're pre-qualified or applying through a fintech platform.
Step 4. Verification & Credit Assessment
Once submitted, the lender will verify all the documents. A credit check is also done to evaluate your repayment history. If you're applying for a secured loan, a valuation of collateral and legal checks will also be initiated.
Step 5. Review & Accept Loan Terms
If approved, you’ll receive a sanction letter with key loan terms, interest rate (fixed or floating), EMI amount, repayment schedule, disbursement mode, foreclosure policy, etc. Don’t rush here. Read every clause and ask questions before accepting.
Step 6. Sign Agreement & Complete Formalities
After you accept the terms, sign the formal loan agreement. You might also be asked to submit original documents as collateral and complete any stamp duty requirements.
Step 7. Loan Disbursement
Once all checks are complete and the agreement is signed, the funds are released. Depending on the loan type, it may be transferred to your account or directly to a vendor (like a builder, car dealer, or educational institution).
Worried your application might not cut it? Don’t stress, here are some practical tips to strengthen your loan profile and improve your chances.
Tips for Improving Your Loan Eligibility
Getting approved for a loan doesn’t mean you fill out a form and get approved instantly. For you to get approved, you need to show lenders that you’re a safe bet. A few smart moves can go a long way in strengthening your application.
- Keep your credit score above 700 by paying dues on time and limiting credit overuse.
- Maintain stable employment and consistent income to build lender confidence.
- Offer high-quality collateral with clear documentation for better loan terms on secured loans.
- Clearly define your loan purpose to improve credibility and approval chances.
- Reduce your existing debt to lower your FOIR (Fixed Obligation to Income Ratio).
- Consider applying with a financially strong co-applicant to strengthen your eligibility.
Of course, no financial product is perfect. Before you commit, it’s only fair to understand the drawbacks as well.
Disadvantages of Term Loans
While term loans offer structured repayment and long-term support, they aren’t without trade-offs.
- Rigid Repayment Schedule: Fixed EMIs mean less flexibility if your financial situation changes unexpectedly.
- Interest Costs Can Add Up: Over long tenures, total interest paid may be significantly higher than the principal amount.
- Collateral Requirement: Many term loans require security, putting your assets at risk if you default.
- Processing Time: Approval and disbursement can take longer compared to unsecured loans or credit cards.
- Prepayment Penalties: Some lenders charge fees if you repay the loan early, limiting your ability to save on interest.
- Impact on Credit Score: Missing EMIs or defaulting can severely damage your credit rating and future borrowing ability.
“Well, great, even term loans have drawbacks….now what?” When you’re stuck between urgent needs and rigid systems, it’s easy to feel cornered. But Pocketly got your back, saving you from the old-school drama.
How Pocketly Can Be Your Solution to Get an Instant Loan
At times when you need urgent money, waiting days or weeks for a traditional term loan can feel frustrating. That’s where Pocketly steps in, designed to deliver quick, hassle-free access to instant loans tailored to your needs. Offering you a seamless experience that fits modern lifestyles, making borrowing easy and transparent.
What makes Pocketly stand out is how it breaks down the usual barriers of term loans, especially when it comes to eligibility and documentation. While traditional term loans often come with strict age limits (usually 21 to 65 years) and extensive paperwork, Pocketly simplifies this by catering to a broader age group starting at 18 years and streamlining document submission via a mobile app.
Here’s how you can get quick cash without the usual hassle with Pocketly:
- Quick Application & Approval: Apply within minutes on your phone with minimal paperwork, so you don’t waste time waiting in queues or dealing with piles of forms.
- Interest Rates & Processing Fees: Pocketly offers competitive interest rates starting at 2% per month, tailored to your profile, with a minimal processing fee of 1% to 8% deducted upon approval.
- Flexible Loan Amounts: Borrow small or medium amounts that suit your immediate requirement, from as low as ₹1,000 up to ₹25,000, giving you just the right financial support without overburdening your repayment plan.
- Simplified Eligibility: Unlike conventional term loans that need long job tenures or high incomes, Pocketly welcomes young adults and those with modest incomes, widening your access to credit.
- Transparent Fees and Interest Rates: No hidden charges mean you know exactly what you’re paying. Interest rates are competitive and clearly stated, so you can plan your repayment without surprises.
- Instant Disbursement: Once approved, funds are transferred directly to your bank account, usually within hours, helping you tackle emergencies or urgent purchases without delay.
- Safe and Secure: With encrypted data and secure document handling, your personal and financial details stay protected throughout the process.
Conclusion
Term loans can be incredibly useful, but the real power lies in understanding how they work, what to watch out for, and how to make them work for you. From choosing the right type of loan to improving your eligibility and being aware of hidden costs, each step matters.
And if you're looking for something faster, easier, and tailored to modern financial needs, platforms like Pocketly offer a smart alternative. With quick approvals, simplified requirements, and instant disbursements, they bridge the gap when traditional term loans feel too slow or rigid.
Ready to skip the hassle and get quick, hassle-free funding? Discover how Pocketly can be your go-to solution for instant loans, simple, fast, and designed with you in mind.
FAQs
Q1. What is the difference between secured and unsecured term loans?
A1. A secured term loan requires you to pledge something valuable, like property, gold, or a fixed deposit, as collateral. If you can’t repay, the lender has the right to recover the amount by selling that asset.
An unsecured term loan, on the other hand, doesn’t need collateral. But because it's riskier for lenders, the interest rates are usually higher, and your credit score becomes a big deciding factor.
Q2. How does my credit score affect my loan approval?
A2. Your credit score tells the lender how trustworthy you are with money. A higher score, typically above 750, shows that you’ve handled past loans or credit cards well, which makes lenders more confident about approving your application. A low score? That can lead to rejection or higher interest rates.
Q3. Can I prepay my term loan?
A3. Yes, most term loans allow prepayment, meaning you can pay off your loan earlier than the scheduled tenure. But watch out: some lenders may charge a prepayment penalty, especially for fixed-rate loans. Always check the fine print or ask your lender before doing so.
Q4. What happens if I miss an EMI?
A4. Missing an EMI (Equated Monthly Instalment) isn’t just a one-time inconvenience. It can lead to:
- Late payment penalties
- A dip in your credit score
- Potential legal follow-up if defaults continue
It’s best to inform your lender in advance if you're struggling; they might offer a grace period or restructuring options.
Q5. Can students apply for a term loan?
A5. Yes, students can apply, especially for education loans. However, most lenders will require either a co-applicant (like a parent or guardian) or proof of future income potential. In cases like Pocketly or other fintech platforms, eligibility is often based on digital profiling rather than just traditional documents.