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Parameters | Term loans | Line of Credit |
---|---|---|
Meaning | This is a loan in which a fixed amount is disbursed for a predefined period. | It is a revolving loan account with a predetermined credit limit, but you are not obligated to use the entire disbursed amount. |
Interest applicability | The lender charges interest on the entire amount disbursed. However, your interest liability decreases with each EMI because the calculation is based on the outstanding balance. | You are only liable to pay interest on the amount you have withdrawn from your revolving loan account. |
Interest rate | The rates are fixed and slightly higher if the term loan is unsecured. | Interest rates are mostly variable and lower when compared to term loans. |
Interest accrual | Interest is accrued soon after the funds are disbursed. | Interest is accrued when you withdraw funds from your loan account, not when they are disbursed. |
Loan amount | Unsecured term loans for personal use can be applied for up to Rs 5,000,000. Secured term loans can have a loan amount of up to rupees crores. | They are available for smaller loan amounts, typically ranging from Rs 2,00,000 to Rs 5,00,000. |
Suitability | They are ideal for big-ticket purchases like buying a vehicle, or home or expanding your business. | You can apply for them if you need to pay your raw material suppliers, pay your employees' salaries, or purchase office supplies. |
The act of paying out money for any kind of transaction is known as disbursement. From a lending perspective this usual implies the transfer of the loan amount to the borrower. It may cover paying to operate a business, dividend payments, cash outflow etc. So if disbursements are more than revenues, then cash flow of an entity is negative, and may indicate possible insolvency.
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