Term Loans in India: Key Features and Different Types

Eligibility Criteria for Term Loans

The eligibility criteria for term loans in India are designed to assess a borrower’s ability to repay the loan. These criteria vary by lender but generally include several key factors that applicants must satisfy. 

Credit Score: A good credit score is often the foremost criterion, reflecting the borrower’s creditworthiness and repayment history. It’s a critical factor for lenders to assess the risk associated with lending.

Income Level: Regular and stable income ensures lenders that the borrower has the ability to repay the loan. The income requirement can differ depending on the loan amount and type.

Employment Stability: For salaried individuals, stable employment with a reputable organization is often a requirement. For self-employed individuals, lenders look at the stability and profitability of the business.

Age: There’s usually a minimum and maximum age limit for eligibility, which can vary depending on the type of term loan. This ensures that the borrower is legally competent to enter into a loan agreement and is likely to repay the loan within the tenure.

Collateral: For secured loans, the value and acceptability of collateral play a significant role. Unsecured loans, while not requiring collateral, can have stricter criteria regarding credit score and income levels.

Debt-to-Income Ratio: This ratio evaluates how much of the borrower’s income is going towards debt repayment, including the potential term loan. A lower ratio indicates a higher capacity to take on new debt.

Factors that Affect the Eligibility of Term Loans

Several factors can significantly impact the eligibility for term loans in India, influencing both the approval process and the terms of the loan itself. Understanding these factors is crucial for potential borrowers to enhance their chances of securing a term loan.

Existing Debt Obligations: The borrower’s existing debt, including credit card debt, other loans, and liabilities, can affect eligibility. A high debt-to-income ratio may lead to loan rejection or higher interest rates.

Age: Age plays an important role, with most lenders setting minimum and maximum age limits for loan eligibility. This ensures that the borrower can reasonably repay the loan within the fixed period. Usually, the borrower needs to be at least 21 years old to secure the loan. 

Income and Employment Stability: A steady income from a stable job or a profitable business assures lenders of the borrower’s ability to repay the loan. Fluctuations in income or employment can raise concerns about repayment capabilities.

Collateral Value: For secured loans, the value and type of collateral can influence loan eligibility and terms. High-value collateral can lead to better loan terms, including lower interest rates.

Credit Score: A high credit score is a testament to a borrower’s financial responsibility and repayment history. Lenders favour applicants with good credit scores, as it reduces the risk of default.

Loan Amount and Tenure: The requested loan amount and chosen repayment tenure can also impact eligibility. Lenders evaluate if the loan amount is justified based on the borrower’s financial situation and if the repayment tenure aligns with the borrower’s age and income stability.

Documents Required for Term Loan Application

Applying for a term loan in India involves submitting several important documents that lenders require to process and approve the loan. These documents play a crucial role in verifying the borrower’s identity, income, employment, and creditworthiness.

Identity Proof: A government-issued ID such as a PAN card, Aadhaar card, Passport, or Driving License serves as proof of identity.

Address Proof: Documents like recent utility bills, Aadhaar card, or Passport verify the applicant’s current residential address.

Income Proof: For salaried individuals, recent salary slips, Form 16, and bank statements are needed. Self-employed applicants may need to provide income tax returns, profit and loss statements, and business bank statements.

Employment Proof: Salaried individuals should provide an employment certificate or ID card, while self-employed individuals might need to show business registration documents.

Credit Score Documentation: Although not always directly submitted by the applicant, being aware of one’s credit score and having documents or reports that reflect this can be beneficial.

Property Documents: In the case of secured loans, documents related to the collateral (property or other assets) will be required.

Advantages and Disadvantages of Term Loans

Term loans can be a reliable financing option for individuals and businesses seeking long-term funding. However, like any financial product, they come with both benefits and drawbacks. Understanding these advantages and disadvantages can help you make an informed borrowing decision.

Advantages:

• Predictable repayment schedule
  
• Lower interest (secured loans)
  
• Large loan amounts possible
  
• Flexible repayment options
  

Disadvantages:

• Collateral risk (for secured loans)
  
• Higher rates for unsecured loans
  
• Prepayment penalties (in some cases)
• Risk of default impacting credit score

Interest Rates and Repayment Terms

When it comes to personal loans, interest rates and repayment terms can vary widely based on several factors.

Credit Score: Generally, a higher credit score can result in lower interest rates, as it indicates a lower risk to the lender.

Income and Employment Stability: Steady income and stable employment history can positively influence the interest rate offered.

Loan Amount and Term: Larger loan amounts and longer repayment terms can sometimes attract lower interest rates.

Type of Loan: Secured loans typically have lower interest rates compared to unsecured loans due to the presence of collateral.

Lender Variability: Different lenders offer varying terms and interest rates based on their lending policies, risk assessment, and market conditions. It’s important for borrowers to shop around and compare offers from multiple lenders to find the best terms that suit their financial situation.

Short-term vs. Long-term Personal Loans:

Short-term Personal Loans: These are typically for smaller amounts and shorter durations. They can be suitable for immediate financial needs but often come with higher interest rates.

Long-term Personal Loans: These loans are for larger amounts and have longer repayment periods. They usually offer lower interest rates, making them suitable for significant financial commitments.

What are the Monthly Installments of a Term Loan?

Monthly installments, also known as Equated Monthly Installments (EMIs), are fixed payments made by the borrower to the lender at a specified date each month. These payments are used to repay both the principal amount and the interest on the loan over a set period. The amount of the EMI depends on the loan amount, the interest rate charged by the lender, and the tenure of the loan.

Loan Amount: The higher the loan amount, the higher the EMI.

Interest Rate: The higher the interest rate, the higher the EMI.

Loan Tenure: The longer the loan tenure, the lower the EMI.

For term loans, the monthly installment can be higher for a short-term loan compared to a long-term loan, as the borrowed amount is spread over fewer months.

If you’re looking for an unsecured loan of up to lakhs with flexible personal loan repayment options, consider Zype. You can borrow the funds you need and choose to pay back in EMIs.

Here’s an example of the EMI structure for a loan amount of ₹1,00,000 at an annual interest rate of 18%:

Also Read: Installment Loans: Know what is it And How Do it Work