A term loan is a deal between a borrower and a lender where the lender provides cash upfront and receives that money back through a series of smaller payments over a certain amount of time (repayment terms). As an incentive for the lender, the borrower pays a percentage of interest.

A business term loan helps business owners with large purchases thanks to the way installment loans work—it spreads the impact of one large cost over many smaller fixed payments (installments) to the lender. Similar to how a student loan helps students invest in their futures, this financial aid can help a small business purchase a new location, vehicle, or piece of equipment that will improve future profits.

While useful and often necessary for business growth, term loans, of course, come with a cost to the borrower. Beyond the monthly payments, these costs might include the following:2

• Interest
• A down payment (if buying real estate or another business)
• An origination fee for starting the loan
• Underwriting fees or closing costs

Whether you’re seeking business loans or your own long-term personal loan, don’t forget to include these additional costs in your planning.

Loans from banks or credit unions are usually harder to qualify for and require a long term of several years, but they offer better rates. An online lender can get you a loan more quickly and with fewer conditions, but you should expect to pay more for that convenience.

Long-term business loans of three to ten years from a bank will usually carry an interest rate between 4% and 6%, depending on your credit history, cash flow, and other details. In addition, banks offer secured loans, where businesses provide collateral in case of an unpaid balance, and unsecured loans, where the business doesn’t provide collateral.

You can find both short-term small-business loans (some as short as several months) and long-term loans from different online peer-to-peer lending or institutional lending companies, and their interest rates can fluctuate a great deal. Some might compare with bank loan rates, but other rates may be nearly twice as much.

Remember that a fixed-rate loan will keep the same interest rate from when you first sign that promissory note (a legal written record of the loan between two entities), a variable-rate loan could end with significantly higher or lower rates than when you started the deal. Many borrowers prefer fixed rates for their reliability.