Loan Corner: Term Loans and How to Use Them…

You or your business needs an infusion of fresh cash to keep the business or family on solid ground.  The next question would be; where to obtain the financing.

One of the biggest challenges for anyone is understanding what financial options are open to you when you suddenly need a little extra money.  Some folks will break out the savings account, pull some money from an IRA or 401(k) and take the tax consequences, or bite the bullet by using a credit card.

A lot of people forget about a simple term loan from a local bank.  Why?  Plenty of reasons, but a lot of the issues arose from years past – higher interest (back when interest rates really were high), strict repayment guidelines, and a long, drawn out approval process are, today, non-issues.

So what, exactly, is a term loan?  In the simplest of terms, a term loan is a lump sum borrowed from a lender and paid off at certain intervals over a set period of time.  Term loans are typically paid back on a bi-weekly or monthly basis, over a period of one to five years.  If you’ve bought a car or a house, you’re probably at least a little familiar with term loans.

The basic mechanics of term loans are simple: Once the application is approved and the offer is agreed upon, the borrower receives the loan, or “principal” amount as a lump sum upfront (minus any fees charged by the lender). The borrower is then responsible for repaying the principal amount in full over the term period, plus interest.

There are two key terms to know that will help you to better understand the cost of a term loan: the interest rate and the annual percentage rate (APR.)

The interest rate is the percentage of the principal amount that the lender charges you to take out the loan. Interest rates can vary from loan to loan, and that variance generally can be understood as a reflection of the loan’s riskiness to the lender.

Interest rate alone won’t tell you the full story, however. The APR is a more effective tool for getting a holistic view of the loan’s total cost. The APR reveals the bottom line of what the loan will actually cost you each year by tallying up the average of the total interest you will pay, including fees and service charges.

Pros and cons of term loans

-Lower interest rates: Term loans are offered at lower interest rates compared to other shorter-term financing options.

-Straightforward budgeting: Term loans are repaid in fixed amounts on a regular basis, so it’s simple to project the required budget for the duration of the loan period.

Term loans have a few different requirements that may not be ideal for all borrowers, including:

-Requires a guarantee: There’s always risk involved in borrowing capital, as most lenders require the borrowers personal guarantee to repay a term loan.

-Requires good credit: Lenders will check your personal financial history and credit score when you apply for a loan.

-Requires demonstrated income: Lenders will also require a demonstrated history of income in order to assess your qualifications for a loan—usually around two years’ worth of financial history.

The general principle you should have in mind when considering whether or not a term loan is right for you is, “Will the solution the loan provides me outpace the APR I expect to repay over the term period?”

There are a lot of different ways to find funding for financial shortcomings, and a term loan isn’t always the right answer – on the other hand, it can often be a competitive way to get the money you need quickly and easily and have, depending on the loan, a tax write off in the process.

New Life Tax Resolution is here for you.

Need a Team to solve a Federal or state tax controversy? Give me a call: Patrick LeClaire at 407-287-6638. I will make every effort to solve your issues. If you choose to go solo,  point you in the right direction.

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About Patrick LeClaire

After 15 years in corporate finance and Tax Preparation, I formed a company as an Enrolled Agent. I insist on superior customer service and the highest standards available as I embark on a journey to resolve one case at a time at New Life Tax Resolution.