The town is in the Shire of Corangamite and on the Princes Highway 212 kilometres (132 mi) south west of the state's capital, Melbourne.

The semi-nomadic Kirrae Wuurong clans originally inhabited the area between Mount Emu Creek and the Hopkins River, and much of their language was recorded by a Scottish squatter, James Dawson.

[5] The first dwelling in the township area was built in 1840 by Donald McNicol, and consisted of a slab hut on the east bank of Lake Terang.

The lake is a circular body 1.8 km in diameter and an average depth of 11 m. The salinity is twice that of seawater.

It has two campuses: one on the western (Warrnambool) side of the town; the other on Strong Street near Cobden Road.

Terang has a moderate oceanic climate (Cfb) with warm summers, albeit with cool nights, and chilly damp winters.