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Term Loan Repayment Schedule: Meaning, Types & Management Tips

Term Loan Repayment Schedule: Meaning, Types & Management Tips

Business planning entails looking for new growth opportunities. These opportunities usually require an investment in something to generate higher returns. It could be an investment in real estate, new equipment, or hiring more employees. Companies in their early growth phase especially need to invest in these opportunities. They may, however, not have easy access to funds for the same. Term loans are among the popular long-term financing options. They could be floating or fixed interest rate loans. They come with various repayment schedules and loan terms. Continue reading to learn what is repayment schedule of loan, and more about understanding debt repayment agreements in detail.

What is a Repayment Schedule of Term Loan? Key Components Explained

Repayment schedule of term loan is a structured plan that specifies how a borrower will repay the loan over a time period. A term loan repayment schedule details things like the loan amount, applicable interest rate, EMI, and repayment tenure, along with a breakup of payments. 

Key components of a repayment schedule of term loan:

  1. Principal Amount

The total amount borrowed that needs to be repaid over the loan tenure.

  1. Interest Rate

The additional cost charged on the principal.

  1. EMI (Equated Monthly Instalment)

The fixed monthly payment combining principal and interest components.

  1. Repayment Tenure

The total duration over which repayment of term loan has to be done, which can vary depending on the loan type.

  1. Amortisation Schedule

A detailed schedule showing how each EMI is divided into principal and interest.

What is a Term Loan & Its Benefits for Businesses

A term loan is a loan where the borrower obtains a lump sum of money in exchange for repayment at a predefined interest rate, usually in instalments. The period of repayment is usually between 1 and 25 years. Loans with a repayment schedule shorter than a year are called short-term loans. A business term loan is typically granted based on good financials and creditworthiness.

A term loan could be beneficial to a business in the following ways:

Access to funds for investment: It gives the business access to a large number of funds at once, which it can use to fund expansion or growth.

Working capital needs: Working capital requirements, such as buying inventory, raw materials, etc., can be managed through loans.

Refinance older debt: The funds can be used to refinance previous debt at a cheaper price if the business has become eligible, or for better liquidity.

Convenient debt repayment agreements: The repayment period and instalment size are negotiable at the borrower’s convenience.

Better financial indicators: Debt increases the return on equity for shareholders.

Also,read: What is a Business Loan?


Different Types of Term Loan Repayment Schedules & Loan Structures

Term loans are usually classified as intermediate and long-term loans based on the period of repayment. Intermediate-term loans have a tenure of 1 to 5 years, while long-term loan tenures can usually go up to 25 years.

Other types of term loans include:

Start-up Loan: The start-up loan is a great business finance option for new ventures that have established businesses. In these loans, the lender looks at the creditworthiness of the applicant along with that of the company. They require proof of the existence of the company in the form of registration. The interest rate, tenure, and amount to be loaned are decided based on cash flow statements and other turnover-related figures. 

Business Loan for Women: Many financial institutions have separate loan schemes for women entrepreneurs. These usually offer better loan terms to women-owned small and medium-sized enterprises to encourage social and financial equality.

Equipment Financing: Various businesses, such as manufacturing companies, require financing for expensive equipment used in production or other value chain activities. Loans to finance this purchase are usually at a lower interest rate as compared to other business finance options.

Loan against property: It is also possible to avail of a term loan by using commercial or residential property as collateral. Usually, a loan amount of up to 70% of the property can be obtained; however, this might vary from lender to lender. 

There are other short-term loans to meet working capital needs, hybrid term loan facilities, and invoice financing that can be availed of to meet liquidity needs. These loans may charge interest based on a base rate, such as a repo rate plus something. These loans could also be fixed interest rate loans. If the interest rates are expected to decrease, it is better to take a floating-rate loan; otherwise, a fixed-rate loan is a cheaper option in the long run.

How to Choose & Structure Your Loan Repayment Schedule

A term loan agreement may consist of a single payment of the loan, where one can pay interest periodically and repay the entire principal in a bullet repayment at the end of the term. On the other hand, it could take the form of Equated Monthly Instalments (EMI), in which one can repay the loan in equal instalments.

Here are some recommendations that can be followed while negotiating a term loan structure:

Understand the gap in funds

One must understand what sort of gap in funds one is facing. For example, if the account receivables take a long time to turn over in comparison to the account payables period, it would require a short-term loan. Similarly, if funds are required to finance equipment and hire more employees, an intermediate-term loan would be best for the business.

Evaluate the cost of financing

Unsecured loans come with high-interest rates; secured loans are cheaper. Also, the cost of a loan includes various fees, such as the origination fee, processing fee, prepayment fee, document processing fee, and post-dated cheque charges.

A lender might charge all or some of these while giving out a loan. One must factor in these charges when evaluating the overall cost of funds for the business.   

Also,read:Complete Guide to Secured and Unsecured Personal Loans 

Examine the repayment terms

One must carefully understand the repayment terms of the term loan agreement, such as tenure, instalment frequency, EMI bounce fee, prepayment penalties, etc. It will help you determine what is repayment schedule accurately. Because the loan will be repaid with cash flows from the business, cash flow expectations must be carefully aligned with the planned instalment size.

Pros & Cons of a Term Loan Repayment Schedule

Let’s evaluate the pros and cons of taking a term loan:

ProsCons
A term loan allows one to negotiate favourable term loan repayment schedules.Any default on EMI can lead to an EMI bounce fee.
It helps build a good credit profile for the company if the loan is repaid as per the schedule.Early payment of the loan might come with prepayment penalties.
The interest rates for term loans are relatively lower than those for short-term loans and other overdraft facilities. The repayment schedule is generally inflexible, and in lean business periods, it could be a burden to track payments.
It makes funds accessible in a lump sum amount, which can be repaid as per financial capacity.The eligibility conditions for a term loan for a business are very stringent.

How to Create & Manage Your Term Loan Repayment Schedule

Here are some of the recommendations one can follow to implement a reasonable repayment schedule:

Use the extra cash to pay more than EMIs: Use any extra cash one might earn for repayment of term loan. One must take prepayment fees into account as a part of the loan terms and ensure that the interest one saves by early repayment of the loan is greater than the prepayment penalty that one might have to pay. It is essential to track payments and ensure that no late fee is paid.

Increase EMI periodically: One can negotiate terms that allow one to modify the EMIs at periodic intervals. This will also enable one to pay off the loan ahead of schedule.

Enable auto-pay settings: It is convenient to set up instalment autopay to ensure that no instalments are missed. This will save one from having to track payments and also ensure that the credit score remains good and one does not end up paying any EMI bounce fees.

Tips for Managing and Tracking Your Repayment Schedule to Avoid Default

You might ask, “what is repayment schedule of loan, and how to manage it?” Here are some tips for managing repayment of term loan.

  • Track EMI dates.
  • Maintain sufficient account balance to avoid missing repayment of term loan accidentally.
  • Set calendar reminders and payment alerts adds an extra layer of safety.
  • If possible, make partial prepayments or occasional lump-sum contributions which can reduce interest and shorten tenure. Always check prepayment charges in advance.
  • If unable to pay, consider requesting a tenure extension. It can lower EMI pressure without harming your credit score. 
  • Automate repayments through auto-debit. 

Borrowers with multiple loans can consider refinancing or consolidation methods. These tips will help you align with the repayment schedule of term loan.

Common Mistakes Borrowers Make with Loan Repayment Schedules

In this section, let’s look at some common term loan repayment schedule mistakes.

  • Choosing a repayment schedule of term loan without a full financial assessment. This includes assessing income, expenses, and long-term goals. 
  • Ignoring how interest rates and loan tenure can impact total repayment costs.
  • Picking repayment schedules that don’t account for any future financial changes.
  • Overlooking prepayment penalties.
  • Not reviewing repayment plans periodically.
  • Not comparing repayment options, or not using tools like loan calculators.

Avoiding these mistakes can make it easier to manage term loan repayment.

Conclusion

Term loans offer an excellent long-term financing option for a venture. Before taking out a term loan, it is critical to understand one’s requirement gap and project future cash flows reasonably. Also, one must carefully evaluate the loan terms to chalk out a convenient repayment schedule. Further, one must ensure that they track payments continuously so that they do not have to pay a late fee or ruin their credit score for future financing. Tata Capital Term Loans offer opportunities to customise a repayment schedule as per one’s requirements.

Term loans designed to support your goals.

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FAQs

What is a term loan repayment schedule and why is it important?

Term loan repayment schedule dictates the EMIs for a loan’s tenure, with granular information on the principal, interest, and timing of the repayment. It is essential for planning and budgeting.

What are the different types of repayment schedules for term loans?

Different types of repayment of term loan schedules include even principal payments, even total balance, unpaid balance, and balloon payments methods.

How do I calculate my EMI and interest outgo on a term loan?

To calculate your EMI and interest on term loans, use online calculators. You can enter the specifics of your loan terms and plan the repayment of term loan accordingly.

Are there any penalties for prepayment or late EMI in a term loan repayment schedule?

There are penalties for late EMI payment in repayment schedule of term loan. With prepayment, your lender might add on a prepayment fee. Contact your loan lender to find out more.

What should I do if I miss an EMI or default on my repayment schedule?

In case you miss or default on your term loan repayment, contact your lender. Pay the due amount, as well as late fees. Use auto-pay methods to automate your repayments.

How can auto-pay or standing instructions help in loan repayment management?

Auto-pay and standing instructions can be used to automate EMI deductions. With these methods in place, you can simplify your term loan repayment management.

Is the repayment schedule the same for all types of loans?

No. Repayment of term loan schedule can vary depending on loan types, the lender’s policies, borrower’s financial capacity, repayment method, and the exact tenure and EMI amounts.

What is the difference between amortisation schedule and repayment schedule?

An amortisation schedule is a breakdown of the interest and principal component of the loan. The term loan repayment schedule is an outline of payment dates and total amounts due.

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