Term Loan
Prêt à terme in French
Quick definition
A term loan is borrowing in its classic form: a lump sum advanced up front, repaid in regular blended payments on a fixed schedule, with a firm end date. Cars, equipment, renovations, and business expansion are its natural territory.
One lump sum, one schedule, one end date
Where revolving credit lets you draw and repay at will, a term loan is a single event: the lender advances the full amount, you spend it on the thing it was for, and you repay on a fixed schedule until the balance hits zero. Each payment blends interest and principal, with the principal share growing as the balance falls. It is the standard structure for car loans, equipment financing, renovation borrowing, and business expansion projects.
The anatomy
Four pieces define the deal. The principal is the amount advanced. The rate is either fixed, locked for the life of the loan, or floating, moving with the lender's prime. The amortization is the schedule that carries the balance to zero; for most personal term loans the term and the amortization are the same length, unlike a Canadian mortgage, where a short term rides on a long amortization.
The fourth piece is security. Pledging collateral, the car, the equipment, sometimes the home, lowers the rate because the lender has something to seize if payments stop. Unsecured term loans exist but are priced noticeably higher, since the lender is relying on your signature alone.
When a term loan beats a line of credit
A line of credit is more flexible and often no more expensive, so why lock into a schedule? Two reasons. First, matching debt to asset life: a loan that ends in five years suits a truck that lasts five years. Finance a depreciating asset on revolving credit and the balance can outlive the asset, leaving you paying for something you no longer own.
Second, forced amortization is a feature, not a bug. Every payment retires principal whether you feel disciplined that month or not, and the loan actually ends. For most borrowers, a guaranteed end date is worth more than the flexibility they give up to get it.
Prepayment: read before you sign
Prepayment terms vary widely, so check them while you can still walk away. An open loan can be repaid early, in part or in full, without penalty. A closed loan restricts prepayment or charges for it, sometimes a flat fee or a few months of interest. Three questions before signing: can I raise my payment, can I make lump-sum payments, and what would paying it all off early cost?
Business term loans and covenants
Business term loans add one layer: covenants, the financial promises attached to the loan, such as keeping debt-service coverage or leverage ratios within agreed bounds and delivering financial statements on time. They are usually manageable, but they mean the loan's health depends on the business's reported numbers, not just on making payments, so read them as carefully as the rate.
In Canada
The largest term loan most Canadians carry is a mortgage, but mind the vocabulary trap: on a Canadian mortgage, the "term" is the rate contract of a few years, while the amortization is the payoff schedule. On an ordinary term loan, the term is the whole life of the loan. Vehicle financing is where term loans touch the most households, and amortizations stretched to seven or eight years have made negative equity, owing more than the vehicle is worth, a common trade-in problem.
Worked example
Dana needs $40,000 for a delivery van. Her line of credit could fund it, but she takes a five-year term loan secured by the van. The payment is fixed, the debt shrinks every month, and the loan ends around the time the van finishes its working life: asset and debt disappear together. Her friend bought a similar van on his line of credit and still owes most of the money four years later; the van aged on schedule, but nothing forced the debt to.
Related terms
Reviewed by Alexandre Bernier, CFP®, CIM®, PFP®·Updated August 2026