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A term loan is any loan that runs for a fixed time period, and then must be paid back in full. 

A term loan may have either a fixed or a floating interest rate.  If the rate is floating, it is usually based on a benchmark rate such as the prime rate published in the Wall Street Journal or the London Interbank Offered Rate (LIBOR).  In addition, many banks set a floor and ceiling for a floating rate in their loan agreements.

Typically, term loans are paid back in monthly installments comprised of part principal and part interest. Another type of term loan is an interest-only balloon loan, with monthly payments covering only the interest on the loan balance until the end of the loan term when the entire balance is paid off in one final payment.

Small businesses often secure term loans to purchase business equipment when they are unable to secure credit from the equipment manufacturer. Technically, home mortgages, student loans and car loans are term loans as well. 

Most term loans do not charge a penalty for early payment. A borrower who pays off a term loan early can save a significant amount of money on the interest he would have had to pay had the loan balance remained outstanding. 

 

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