Chapter

Term Loan – Types

A term loan is a loan from a bank for a specific amount that has a specified repayment schedule and a fixed or floating
interest rate.

Types of term loan

On the basis of repayment

On the basis of time On the basis of security
methods

On the basis of time

The loans and advances shown under Term Loans are bifurcated as under:

1. Short-term loan i.e, loans and advances granted for a period of 1 year.
2. Medium-Term Loans i.e, loans and advances granted for a period of above 1 year and up to and inclusive of
3 years.
3. Long-Term Loans i.e, loans and advances granted for a period of above 3 years.

On the basis of Security

Secured loan - Secured loans are protected by an asset. The item purchased, such as a home or a car, can be used as
collateral. The lender will hold the deed or title until the loan is paid in full. Other items can be used to back a loan
too. This includes stocks, bonds, or personal property.

Unsecured Loan - Unsecured loans are the reverse of secured loans. Lenders take more of a risk by making this loan,
because there is no asset to recover in case of default. This is why the interest rates are higher.

Prepared by: Raman Luthra

Chartered Accountant
On the basis of repayment method

Equal Principal Payments: The equal principal payment plan also provides for payment of accrued interest on the
unpaid balance, plus an equal amount of the principal. The total payment declines over time. As the remaining
principal balance declines, the amount of interest accrued also declines.

Example of loan amortization: Equal Principal payment.

Loan amount 10,00,000, annual rate 12%
12 Monthly payments

Equal Principal Payments

Monthly
Principal payment Interest Unpaid balance
payment
10,00,000.00
1 93,333.33 83,333.33 10,000.00 9,16,666.67
2 92,500.00 83,333.33 9,166.67 8,33,333.33
3 91,666.67 83,333.33 8,333.33 7,50,000.00
4 90,833.33 83,333.33 7,500.00 6,66,666.67
5 90,000.00 83,333.33 6,666.67 5,83,333.33
6 89,166.67 83,333.33 5,833.33 5,00,000.00
7 88,333.33 83,333.33 5,000.00 4,16,666.67
8 87,500.00 83,333.33 4,166.67 3,33,333.33
9 86,666.67 83,333.33 3,333.33 2,50,000.00
10 85,833.33 83,333.33 2,500.00 1,66,666.67
11 85,000.00 83,333.33 1,666.67 83,333.33
12 84,166.67 83,333.33 833.33 0.00
Total 10,65,000.00 10,00,000.00 65,000.00 0

Equal payments with a balloon payment: A balloon payment, simply put, is a large payment that is due at the end
of a loan term. It is different from a fully amortized loan, where a loan is paid back in small but equal payments. A
balloon loan comprises a stream of constant payments followed by a large payment at the end, which is called the
balloon payment.

Example of loan amortization: Equal total payment.

Loan amount 10,00,000 annual rate 12%
12 Monthly payments of 50,000 and a balloon payment of 4,00,000 at the end of 12 month.

Prepared by: Raman Luthra

Chartered Accountant
 Equal Principal Payments With balloon payment

Monthly
Principal payment Interest Unpaid balance
payment
10,00,000.00
1 60,000.00 50,000.00 10,000.00 9,50,000.00
2 59,500.00 50,000.00 9,500.00 9,00,000.00
3 59,000.00 50,000.00 9,000.00 8,50,000.00
4 58,500.00 50,000.00 8,500.00 8,00,000.00
5 58,000.00 50,000.00 8,000.00 7,50,000.00
6 57,500.00 50,000.00 7,500.00 7,00,000.00
7 57,000.00 50,000.00 7,000.00 6,50,000.00
8 56,500.00 50,000.00 6,500.00 6,00,000.00
9 56,000.00 50,000.00 6,000.00 5,50,000.00
10 55,500.00 50,000.00 5,500.00 5,00,000.00
11 55,000.00 50,000.00 5,000.00 4,50,000.00
12 4,54,500.00 4,50,000.00 4,500.00 0.00
Total 10,87,000.00 10,00,000.00 87,000.00 0

Equal Total Payments(Equal monthly instalments): When the equal total payment method is used, each payment
includes the accrued interest on the unpaid balance, plus some principal. An equated monthly instalment is a fixed
payment amount made by a borrower to a lender at a specified date each calendar month.

Example of loan amortization: Equal total payment.

Loan amount 10,00,000 annual rate 12%
12 Monthly payments
PVAF(1%,12)= 11.255

Prepared by: Raman Luthra

Chartered Accountant
 Equal Total Payments

Monthly
Principal payment Interest Unpaid balance
payment
10,00,000.00
1 88,849.40 78,849.40 10,000.00 9,21,150.60
2 88,849.40 79,637.89 9,211.51 8,41,512.71
3 88,849.40 80,434.27 8,415.13 7,61,078.43
4 88,849.40 81,238.62 7,610.78 6,79,839.82
5 88,849.40 82,051.00 6,798.40 5,97,788.81
6 88,849.40 82,871.51 5,977.89 5,14,917.30
7 88,849.40 83,700.23 5,149.17 4,31,217.07
8 88,849.40 84,537.23 4,312.17 3,46,679.85
9 88,849.40 85,382.60 3,466.80 2,61,297.24
10 88,849.40 86,236.43 2,612.97 1,75,060.82
11 88,849.40 87,098.79 1,750.61 87,962.02
12 88,849.40 87,969.78 879.62 -7.76
Total 10,66,192.80 10,00,007.76 66,185.05 0

Prepared by: Raman Luthra

Chartered Accountant