- Date : 24/11/2021
- Read: 5 mins
The choice between a term loan and a flexi loan depends on how well you can estimate your travel expenses.
Ganesh and his family are excited about their annual year-end vacation to Kerala. They are looking forward to celebrating Christmas and welcoming the New Year in style in God's Own Country. The vacation duration, itinerary, activities, etc., have been finalised. All that remains to be decided is whether to fund the vacation with a bank term loan or a fintech flexi loan. It’s a dilemma that many people face.
This article will discuss whether a term loan or flexi loan should be your first choice. Let us start by understanding term and flexi loans, their features, and then how to decide which one to choose.
What is a term loan?
A term loan comes with a fixed tenure and a fixed EMI. The entire loan amount is disbursed to your bank account in a lump sum. Interest is charged on the entire loan amount, whether it is utilised or not. The EMI has the principal as well as the interest component.
For example, Ganesh takes a term loan of Rs 1 lakh from a bank for a tenure of 1 year at 11% p.a. The EMI for the loan works out to Rs 8838. In this case, the term loan will have a fixed tenure of 1 year and a fixed EMI of Rs 8838. If you want to calculate the EMI for a term loan, you can use an online calculator.
What is a flexi loan?
In a flexi loan, the bank, NBFC, or fintech sanctions a specified limit (say Rs 1 lakh). The sanctioned limit works like a credit line or overdraft. The borrower can use any amount from this approved credit line (loan account) multiple times as per their requirement. The borrower is charged a monthly interest for the amount withdrawn/utilised.
For example, let’s assume Ganesh takes a Rs 1 lakh flexi loan from a fintech for a tenure of 1 year at 11% p.a. If he withdraws the entire limit, the interest-only EMI for the loan works out to Rs 917. Please note that the EMI will not include the principal component. He will have to repay the outstanding principal amount at the end of the loan tenure, usually one year. He can also make a partial prepayment or full repayment of outstanding principal, whenever he wants, during the year, depending on the availability of money.
A flexi loan allows partial prepayment or full repayment, usually with no extra charges. In this case, Ganesh can make a partial prepayment of the principal amount, and his EMI will reduce the following month based on the outstanding principal. For example, if Ganesh prepays Rs 50,000 out of the total Rs 1 lakh, from next month, he will be charged EMI only on the balance of Rs 50,000 outstanding. Accordingly, his EMI will reduce to Rs 458 from next month. If he makes full repayment of outstanding principal, there will be no EMI from next month.
Comparison between a term loan and flexi loan
In the earlier section, we had an overview of term loans and flexi loans and their features. Now, let us compare both of them.
Travelling with a term loan
- A term loan will provide you with a fixed amount in a lump sum in your bank account.
- The tenure and EMI to be paid will be fixed.
- You can plan the EMI repayment as the lending organisation will share the repayment schedule. There can be prepayment charges.
Travelling with a flexi loan
- A flexi loan will provide you with a credit line wherein the sanctioned limit will be fixed.
- From the sanctioned amount, you will be able to withdraw as much as you want, whenever you want, as many times as you want.
- You will need to pay interest only on the amount utilised and for the tenure utilised.
- You can prepay the principal - either in part or full - without any charges.
Choosing between a term loan and a flexi loan
You need to repay the term loan over a specified period wherein the EMI is fixed. So, if you know the exact cost of your vacation, and if you prefer to pay a fixed EMI amount every month, you may choose to go for a term loan.
A flexi loan provides flexibility to withdraw how much ever you want, multiple times, from the sanctioned limit. Interest will be charged only on the withdrawn amount. Repayment is also flexible. So, if you don’t know the exact cost of your vacation, and if you prefer to repay the loan amount as and when you have surplus liquidity, it makes sense to opt for a flexi loan.
Depending on whether you know the exact cost of your vacation or not, you can choose between a term loan and a flexi loan. Your choice also depends on whether you prefer to repay the loan with a fixed EMI or as and when you have surplus liquidity. Once you have chosen the type of loan, it’s time to enjoy your vacation to the fullest. Make sure you bring home happy memories that last a lifetime!