Term loans

Definition

Term loans are a type of loan with a specified repayment schedule and a fixed or variable interest rate. They are typically paid off in regular installments over a set period of time, such as monthly or quarterly payments.

5 Must Know Facts For Your Next Test

1. Term loans have a predetermined repayment schedule, which includes both principal and interest components.
2. The amortization schedule of a term loan shows how much of each payment goes towards principal and how much goes towards interest.
3. Interest rates on term loans can be either fixed, meaning they stay the same throughout the loan term, or variable, meaning they can change based on market conditions.
4. The total cost of borrowing for a term loan can be calculated using the present value formula for annuities.
5. Early repayment of a term loan may incur penalties depending on the terms agreed upon with the lender.

Review Questions

• What is an amortization schedule and why is it important for term loans?
• How do fixed and variable interest rates differ in the context of term loans?
• What factors should be considered when calculating the total cost of borrowing for a term loan?

Related terms

Amortization: Repayment of a loan through regular installments that cover both principal and interest.

Present Value: The current value of future cash flows discounted at an appropriate interest rate.

Annuity: A series of equal payments made at regular intervals over time.