A term loan is a lump sum borrowed and repaid over a fixed schedule of payments, typically used to finance long-term assets or major investments.
A term loan provides a fixed amount up front, repaid over a set period through scheduled payments of principal and interest. It suits long-term needs, buying equipment, a vehicle, a building, or funding an expansion, where the asset's useful life matches the loan term.
The interest portion is generally deductible; the principal repayment is not (it reduces the loan liability). Matching the loan term to the asset's life is sound practice, financing a five-year asset with a five-year loan, rather than putting long-term purchases on a short-term line of credit.
A company borrows $100,000 over five years to buy machinery, repaying about $1,900 a month. The interest is deductible; the principal portion reduces the loan balance and is not an expense.
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