A term loan is a financial agreement whereby a bank or lender provides a predetermined amount of money to a borrower, which must be repaid over a fixed term in accordance with specific terms and conditions. Term loans are typical for businesses requiring significant capital investments, such as purchasing equipment or funding expansion projects, or for individuals borrowing for personal reasons, such as home improvements or large purchases. These loans generally come with a fixed or variable interest rate that reflects the cost of borrowing.
The repayment terms can vary, but they are often structured with regular installments over the term's duration. For example, a company might take out a term loan of $500,000 with a 5-year repayment term at a 6% annual interest rate, entailing predetermined monthly payments. Term loans may also include specific covenants, such as requiring the borrower to maintain a certain financial condition or restricting additional borrowing.
These loans are a critical tool for businesses and individuals seeking to manage liquidity and fund high-investment projects. Regular repayment helps build creditworthiness, which may assist in future financial needs.