How Term Loans Work
Term loans are normally secured by the asset they are designed to finance. For instance, a piece of equipment with a service life of ten years may be purchased with the help of a five year term loan. A mortgage is a type of term loan, secured by property. An auto loan is a term loan secured by the vehicle. Term loans make sense when the asset being financed has a long service life. To put it another way: long term debt for long term assets.
If a business borrows $55,000 with an 11% interest rate that needs to be paid back in 3 years. That means you’d pay back the loan with monthly payments of $1800.63, which will stay the same over the life of the loan. This means you will have predictable monthly payments and know exactly when the loan will be paid back.
Most viable businesses will qualify for a term loan with different variables. These variables are determined by assets, business revenues, and credit rating. Term loans have a longer repayment cycle than other short term options so credit is more of an important factor.
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