At some point or another in your lifetime, you may need to obtain a loan. The loan may be for a large purchase, trip or educational endeavor. Here’s some information about loans that can help you understand them and the processes involved in getting them:
Types of Loans
From a broad perspective, there are two types of loans: secured and unsecured. An unsecured personal loan is an advance a lender gives you without requiring you to give them anything to hold onto as collateral. A secured loan, on the other hand, would require you to offer something like the title to your car, your home deed, or a cash deposit to ensure the lender that they are going to get their money back. An unsecured loan is a better option if you don’t want to risk losing your item. However, a secured loan may give you access to a higher amount and a lower interest rate. You can also think of loans as long-term and short-term. A short-term loan has a lifespan of 30-90 days in most cases. Long-term loans extend past a year. Advantages and disadvantages exist with both types of advances. Short-term loans usually have higher interest rates while long-term loans are usually harder to get.
Most lenders want you to have a good credit score and a low debt-to-income ratio before they will approve you for an advance. You have to be at least 18 years old to obtain a loan, as well, and that’s because you have to sign a contract to get it. Some lenders will require you to provide them with a list of references that they can contact to verify your reliability, as well. You can call and ask any lender about their policies before you apply for their product. Additionally, you can conduct some personalized research to get more information about their reputations.
Principal vs. Interest
Loans have several parts to them. The principal refers to the base amount that you will borrow and repay. For example, let’s say you want to take a loan of $100. The $100 is the principal. The lender may have a fee that they charge, too. Then there’s the interest charge, which can range from 9.9 percent all the way to 30 percent and beyond. The worse your credit score is, the higher your interest rate tends to be. You have to be very careful when you choose a loan and make sure that the interest rate is not ridiculous.
The lender will let you know the repayment terms in the contract. All you’ll have to do is agree to them by signing the contract. You will know exactly how much payment will be due each time and the exact date that you have to make the payment. Your first payment will be due on the date that the contract specifies.
Loans and Your Credit
You can build a positive credit score and report if you pay back your loans on time, especially if they are traditional bank loans and such. Some of the quick cash short-term loans don’t offer that option because the lenders don’t report the payments to the credit bureaus. You may want to ask before you take a loan so that you know where you stand.
That’s what to know about loans. It’s just some basic information about them and is in no way an exhaustive page of information. You can speak to a financial advisor for some additional information.