1. MATURITY – The maturity period of term loans is typically longer in case of sanctions by financial institutions in the range of 6-10 years in comparison to 3-5 years of bank advances. However, they are rescheduled to enable corporate borrowers tide over temporary financial exigencies.
2. NEGOTIATED – The term loans are negotiated loans between the borrowers and the lenders. They are akin to private placement of debentures in contrast to their public offering to investors.
3. SECURITY – Term loans typically represent secured borrowing. Usually assets, which are financed with the proceeds of the term loan, provide the prime security. Other assets of the firm may serve as collateral security.
All loans provided by financial institutions, alongwith interest, liquidated damages, commitment charges, expenses, etc., are secured by way of:
a) First equitable mortgage of all immovable properties of the borrower, both present and future for the entire institutional loan including commitment charges, interest, liquidated damages and so on; and
b) Hypothecation of all movable properties of the borrower, both present and future, subject to prior charges in favour of commercial banks for obtaining working capital finance/advance.
4. INTEREST PAYMENT AND PRINCIPAL REPAYMENT – The interest on term loans is a definite obligation that is payable irrespective of the financial situation of the firm. To the general category of borrowers, financial institutions charge an interest rate that is related to the credit risk of the proposal, subject usually to a certain minimum prime lending rate/ floor rate (PLR).
Financial institutions impose a penalty for defaults. In case of default of payment of installments of principal and/or interest, the borrower is liable to pay by way of liquidated damages additional interest calculated at the rate of 2 per cent per annum for the period of default on the amount of principal and/or interest in default.
In addition to interest, lending institutions levy a commitment fee on the unutilized loan amount.
The principal amount of a term loan is generally repayable over a period of 6 to 10 years after the initial grace period of 1 to 2 years.
Typically, term loans provided by financial institutions are repayable in equal semi-annual installments, whereas term loans granted by commercial banks are repayable in equal quarterly installments.
With this type of loan amortization pattern, the total servicing burden declines over time, the interest burden declining and principal repayment remaining constant.
In other words, the common practice in India to amortized loan is repayment of principal in equal installments (semi-annual/annual) and payment of interest on the unpaid/outstanding loans.
2. NEGOTIATED – The term loans are negotiated loans between the borrowers and the lenders. They are akin to private placement of debentures in contrast to their public offering to investors.
3. SECURITY – Term loans typically represent secured borrowing. Usually assets, which are financed with the proceeds of the term loan, provide the prime security. Other assets of the firm may serve as collateral security.
All loans provided by financial institutions, alongwith interest, liquidated damages, commitment charges, expenses, etc., are secured by way of:
a) First equitable mortgage of all immovable properties of the borrower, both present and future for the entire institutional loan including commitment charges, interest, liquidated damages and so on; and
b) Hypothecation of all movable properties of the borrower, both present and future, subject to prior charges in favour of commercial banks for obtaining working capital finance/advance.
4. INTEREST PAYMENT AND PRINCIPAL REPAYMENT – The interest on term loans is a definite obligation that is payable irrespective of the financial situation of the firm. To the general category of borrowers, financial institutions charge an interest rate that is related to the credit risk of the proposal, subject usually to a certain minimum prime lending rate/ floor rate (PLR).
Financial institutions impose a penalty for defaults. In case of default of payment of installments of principal and/or interest, the borrower is liable to pay by way of liquidated damages additional interest calculated at the rate of 2 per cent per annum for the period of default on the amount of principal and/or interest in default.
In addition to interest, lending institutions levy a commitment fee on the unutilized loan amount.
The principal amount of a term loan is generally repayable over a period of 6 to 10 years after the initial grace period of 1 to 2 years.
Typically, term loans provided by financial institutions are repayable in equal semi-annual installments, whereas term loans granted by commercial banks are repayable in equal quarterly installments.
With this type of loan amortization pattern, the total servicing burden declines over time, the interest burden declining and principal repayment remaining constant.
In other words, the common practice in India to amortized loan is repayment of principal in equal installments (semi-annual/annual) and payment of interest on the unpaid/outstanding loans.