Term Loan

A loan which is repaid through regular periodic payments usually last between one and ten years, but may last as long as 30 years in some cases. A term loan usually involves an unfixed interest rate that will add additional balance to be repaid.

Term loans can be given for an individual basis or as small business loans. The ability to repay over a long period of time is attractive for new or expanding enterprises, as the assumption is that they will increase their profit over time.

Term loans are a good way of quickly increasing capital in order to raise a business’ supply capabilities or range. For instance, some new companies may use a term loan to buy company vehicles or rent more space for their operations.

All property loans in Malaysia were basic term loans. Conventionally, it was not easy for a borrower to make additional payments to their property loans. They had to write in to the bank explicitly to request for such an arrangement to be made possible. Some borrowers made the mistake of making additional payments to their loans without explicitly requesting such an arrangement, thinking it would reduce the principal amount owed. It didn’t.

The money just sat there in the bank (as Pre-Payment), neither earning an interest as a deposit, nor saving them interest on the loan amount. Additionally, any additional money paid to these term loan accounts in most cases could not be easily taken out in the case of an emergency. For this reason, the borrowers had to be absolutely certain before they made any additional payments that it was not money they would need.

There were 2 reasons for such arrangements then: Banks were reluctant to let their customers reduce their principal amounts as they pleased because they earned money on interest payments. Banking systems and processes then were not as advanced as today.

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