What type of loan is a term loan?

• A. A short-term asset-backed loan
• B. A lump sum with specific repayment terms
• C. A loan issued only to businesses
• D. A revolving credit facility

Answer: (B)

A term loan is defined as a lump sum of money that is borrowed from a financial institution and is expected to be paid back in regular installments over a defined period. This type of loan comes with specific repayment terms, which include the schedule for repayments and the interest rate applied to the borrowed amount. The borrower typically receives the full loan amount upfront and makes fixed or varying payments over the life of the loan, which distinguishes term loans from other types of loans such as revolving credit facilities.

In contrast, other loan types like those associated with short-term asset-backed loans, or revolving credit facilities, involve different structures or repayment mechanisms. For example, short-term loans may not provide the same lump sum repayment structure, and revolving credit facilities allow borrowers to draw, repay, and borrow again, which is fundamentally different from a fixed-term loan with scheduled repayments. The option that states that a loan is issued only to businesses is too restrictive; term loans can be available to individuals as well as businesses. Thus, the accurate description of a term loan is that it is a lump sum with specific repayment terms.