Many people have questioned the financial habit of taking out loans. These people would like to know if it is a good or bad idea.
Well, we should kick off by saying loans are neither good nor bad. This might not be the answer you might have been anticipating but it is what it is.
What determines whether taking out a lån (loan) is a good or bad idea is down to a lot of factors. Some of the factors in question include things like the motive for securing the loan, the ability of the borrower to pay back, and the policies binding on both the lender and borrower.
You are advised to view your decision to take out a loan in light of these factors and even more. But also important is the need to understand how typical loans from financial institutions work. By doing this, you will be in a good position to choose the right loan plans at the very least.
To this end, this article will touch on some of the things that you need to know about loans. Frankly, this is a subject that concerns everyone and so you should do well to continue reading. This is so that you will be better informed to make the right financial decisions.
What Is a Loan?
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This is any of a wide range of credit types that allows a borrower to receive an agreed amount of money from the lender. The terms and conditions for repayment are determined by the policies backing up the loan plan. More often than not, this includes paying interest in addition to the principal amount that was borrowed.
There are various loan plans and they are usually named after the purpose. For example, there is such a thing as student loans. This plan enables students who are unable to fund their studies to pay for their tuition and possibly other expenses as they study.
There is also such a thing as mortgage loans. Considering the always rising prices of real estate commodities, this is how many homeowners can afford a home or real estate property of their own. They gradually pay back the principal and other attached fees based on the agreement and continue to have increased equity in the property they have purchased with the loan.
Just as with the student and mortgage plans explained above, some other plans include personal, auto, credit card, refinance – loans, and several others. Financial service providers in the business of lending money to people design these plans to cater to expenses of all kinds.
Basic Things to Know About Loans
A number of things have been discussed about loans above but there is still more that you need to be aware of. This is why you should pay serious attention to this section of the article as well. Having made this clear, some of the basic things that you need to know about these credit vehicles include the following:
Secure and Unsecure Loans – Types of Loans
Many people mistake the loan plans for the loan types. We identified some of the plans above and some of the ones we discussed included student and mortgage. Well, there are just two types – secure and unsecure loans. The striking difference between both is the requirement of collateral.
Collateral is the term used to describe what the borrower would give up as compensation to the lender if the borrower is unable to pay back the debt owed to the lender. Collateral is used in the secure type. On the other hand, it is not required with the unsecure type.
It is considered unsecured as getting back the amount lent to the borrower is not absolutely guaranteed considering that there is no collateral to make up for the amount lent. Other than this striking difference, some of the other differences between the secure and unsecure loan types include the following:
The Terms of Unsecured Loans Are Harsher
Many novices think that secure loans are harsher than the unsecure type. They come to this conclusion seeing that there is the possibility of losing collateral that is often more valuable than the amount lent.
Well, this is not far from the truth but it would only be this way if the borrower cannot pay back as agreed. As long as the borrower can abide by the terms and conditions, it usually turns out that secure loans are more reasonable.
They are better than the unsecure type in areas such as interest rates. Lots of unsecured loans have a harsher interest rate and more hostile terms compared to the secure type.
Unsecured Loans have Stricter Measure for Granting Loans
Getting an unsecured loan is a lot more difficult than getting a secured loan. It is not hard to figure out why this is the case. Seeing that there is no collateral involved, the lender needs to be very certain that the borrower can pay back the unsecured loan.
There should be some sort of background check with the secure type (as well) but it would not be as intense as the unsecure type. The reason is clearly that there is collateral involved and this can make up for the borrower’s inability to pay back. But of course, this is only if it comes to this.
These are just a few of the differences between these types of loans. If you would like to find out more about the differences, you can visit: https://www.cnbc.com/
Interest Rates
No one should take out a loan without having a good understanding of how interest rate works. Doing otherwise would be making a grievous mistake.
So, you need to understand a loan’s terms and conditions especially as it pertains to the interest rate. On that note, you should know that there are two types of interest rates – variable and fixed.
As the name suggests, the fixed type remains the same. On the other hand, variable interest rates are capable of rising and falling as determined by several factors.
A loan with a fixed interest rate is usually higher. On the part of the lender, this is to compensate for a possible rise in interest rate. Other than understanding the types of interest rates, some other things to know about interest rates include the following:
Credit Score Determines the Interest Rate
Especially with the unsecured loan type, the credit score of the borrower determines a lot. For starters, it determines whether the loan will be granted or not.
Other than this, the higher the borrower’s credit score, the more likely the borrower will get a low-interest rate. On the other hand, those with a low credit score will likely end up with a high-interest rate. So, it is advised that people pay attention to building their credit score before securing loans.
You Should Not Only Think about Interest Rate
You should not be too interested in getting a loan to the point you pay little or no attention to the interest rate. However, there is even more that you should pay attention to.
The reason is that the interest rate is not the only extra charge you pay back in addition to the principal borrowed. This is why you need to calculate the Annual Percentage Rate (APR) and not just the interest rate.
The Annual Percentage Rate is a combination of all the extra charges you pay (including the interest rate). If you would like to know more about what is involved in a typical Annual Percentage Rate, you can go through this article.
Conclusion
There has always been the possibility of getting loans. However, the financial system in charge of this has only improved with time.
For one, borrowers have a better understanding of how loan applications and payback work. This is especially because of resources such as this one shedding light on the subject.
We have treated a few subjects revolving around loans here and advise that you make good use of these details. You should do this by paying attention to things such as the Annual Percentage Rate before getting the principal loan.
