Legal Definitions - term loan

A term loan is a type of loan where a borrower receives a specific amount of money upfront and agrees to repay it over a predetermined period, known as the "term." This repayment typically occurs through regular, fixed installments that include both principal and interest, until the entire loan amount is fully paid off by the end of the agreed-upon term. Unlike revolving credit lines, a term loan provides a one-time disbursement of funds, and the borrower cannot re-borrow from the same facility once payments are made.

Here are some examples to illustrate the concept of a term loan:

• Example 1: Small Business Equipment Purchase

  A local bakery decides to upgrade its ovens and mixers. To finance this, the owner secures a $50,000 loan from a bank, agreeing to repay it over five years with fixed monthly payments. This is a term loan because the bakery receives a lump sum ($50,000) and commits to a structured repayment schedule over a defined period (five years) until the debt is fully satisfied.

• Example 2: Automobile Financing

  Sarah purchases a new car and takes out a $30,000 loan from a credit union. Her loan agreement specifies that she will make fixed monthly payments for 72 months (six years) at a set interest rate. This arrangement is a term loan as Sarah receives the full amount to buy the car immediately and is obligated to repay it in consistent installments over a fixed duration, after which the loan will be completely paid off.

• Example 3: Corporate Expansion Project

  A manufacturing company plans to build a new factory wing to increase production capacity. They secure a $5 million loan from a consortium of banks, with an agreement to repay the principal and interest over a ten-year period through quarterly installments. This substantial financing is a term loan because the company receives the entire sum for its project at the outset and is committed to a predefined, long-term repayment schedule until the debt is retired.