A loan can help you in multiple ways. Want to buy a home? Or the car of your dreams? You have a personal or home loan. Need funds for your startup? You have a business loan to take care of it. There are multiple types of loans offered by financial institutions that can take care of your expenses and keep you worry-free. However, it is important to understand the type of loan you require.
In this article, we will help you understand the difference between term loans and flexi loans. While both these loans are taken for personal needs, there are key differences in their nature, interest rates and repayment flexibility.
Loan Options Comparison
Let’s understand the difference between term loans and flexi loans by focusing on the key comparisons:
1. Nature of the Loan
- What is a Flexi Loan?
A flexi loan is a kind of personal loan that allows the borrower to take funds up to a certain limit in the form of an overdraft or line of credit. Under this type of loan, the borrower is charged an interest rate only on the amount that is withdrawn from the sanctioned amount and not on the whole amount.
- What is a Term Loan?
A term loan is a kind of loan where the borrower takes funds from a lender for a certain amount of time, usually ranging between five to twenty years. Under this type of loan, the borrower is liable to pay an interest rate on the whole amount.
2. Purpose of the Loan
- Which Loan, a Term Loan or a Flexible Loan, is Preferable?
To understand which type of loan is preferable, you first need to understand their purposes;
Flexi Loan Purpose:
Flexi loans are designed to serve versatile purposes as it allows the borrower to get a certain loan amount sanctioned and withdraw only the funds that is required. This type of loan is usually taken when the applicant is unsure about their financial future.
Here’s how a flexi loan works: Let’s say you take a flexi loan for ₹10 Lakhs. Now you can withdraw 4 lakhs to purchase a car and repay this with an interest rate. Next, you decide to take a vacation, for this, you take out ₹1 lakh and repay in the same manner. You will have ₹5 lakhs in your flexi loan fund for future needs and you do not have to pay any interest on the amount not withdrawn.
Term Loan Purpose:
A term loan is often taken to meet an ongoing financial need as opposed to a flexible loan. Under this type of loan, the borrower has to repay the whole amount with fixed monthly instalments. As the name suggests, a term loan is fixed for a tenure like 5 years or 10 years and the borrower has to repay the amount within the tenure.
- What is a Flexi Loan vs a Term Loan?
A Flexi loan is a type of loan taken to meet a specific need like purchasing a car, wedding, vacation, house etc whereas a term loan is taken for an ongoing expense like EMIs etc.
- Which Loan is Better – a Flexi Loan or a Term Loan?
Both types of loans provide additional financing to the borrower and depending on personal requirements, a borrower can understand which loan is better. For instance, a term loan is better for your ongoing expenses while a flexi loan is better for meeting the financial needs of a specific expense.
3. Interest Charged
Another crucial factor in comparing both types of loans is evaluating the interest charged. Here’s an insight to help you make an informed decision:
- Interest Charged on Term Loan:
Under a term loan, the borrower has the liability to pay interest rate on the whole amount. The interest rate is fixed by the lender and has to be paid through monthly instalments, in most cases. The interest charged on a term loan varies based on factors like; the borrower’s credit score, the tenure of the loan and economic factors including RBI’s policies.
- Interest Charged on Flexi Loan:
A flexi loan works like a borrowed fund for the borrower who can take out the amount as and when needed. Under this type of loan, the borrower is liable to pay an interest rate only on the amount withdrawn from the sanctioned fund. Just like a term loan, the interest rate charged on a flexi loan varies due to similar factors.
4. Option to Pay Only Interest as EMIs
Under a flexi loan, the borrower has the option to pay only interest as EMI for the initial tenure by offering to prepay the principal amount either wholly or partially. On the other hand, under a term loan, lenders, in most cases, do not provide the option to pay only interest as EMIs.
5. EMI Amount
The EMI amount on a term loan or flexi loan is subjective to the lender you choose. However, in most cases, EMI on a term loan is higher than a flexi loan.
6. Accessibility
Possibly the biggest challenge borrowers face is; accessibility to loan amounts. You must have come across situations where a financial institution is offering flashy loan policies but comes with a wide list of eligibility criteria making it practically impossible to get the loan sanctioned.
Now, to understand the accessibility of term loans and flexi loans, let’s take a look at the eligibility criteria and document requirements.
Term Loan
- Eligibility Criteria: An applicant looking for a term loan must be an Indian citizen, above the age of 24 years with an impressive Credit Score.
- Documents Required: An applicant must provide KYC documentation, including an Aadhaar, PAN card, passport, utility bills (electricity, telephone, or water), or voter ID (identity, address, and age proofs) along with documents of business ownership and financial statement.
Flexi Loan
- Eligibility Criteria: An applicant looking for a term loan must be an Indian citizen, above the age of 18 years with an impressive Credit Score.
- Documents Required: For a flexi loan, document requirements are mostly minimal like Identity proof, bank account statements etc.
Note– This is a general list of eligibility criteria and document requirements that might vary depending on the lender.
Summing Up
A term loan and flexi loan are designed to provide additional financing. If you have reached till here, you must have understood that both the loans serve varying needs and with an understanding of the basics, you are all ready to make an informed choice.
To access a seamless and quick borrowing experience, you can head to Lendingkart. At Lendingkart, you get business loans for varying requirements of your business loan.
FAQs
- What is a Term Loan?
A term loan is a kind of loan where the borrower takes funds from a lender for a certain amount of time, usually ranging between five to twenty years. Under this type of loan, the borrower is liable to pay an interest rate on the whole amount.
- What is a Flexi Loan?
A flexi loan is a personal loan that allows the borrower to withdraw funds up to a certain limit in the form of an overdraft or line of credit. Under this type of loan, the borrower is charged interest only on the amount withdrawn from the sanctioned amount and not on the whole amount.
- How is a Term Loan different from a Flexi loan?
A term loan differs from a flexi loan in multiple aspects including; the interest charged, the tenure, the repayment method and the purpose.
- Which is better, a Term loan or Flexi Loan?
A Term loan and a Flexi loan have different features for varying requirements of the borrower. To decide which loan is better, you must first understand their purposes. For instance- A term loan is usually taken to meet ongoing financial needs like EMIs or small business needs and a flexi loan is taken to take care of a specific purpose like purchasing a car or wedding expenses.
