What is Loan?
The term loan refers as one type of credit or sum of money that is borrowed from a lender like bank or financial institutions in exchange of future payment with the expectation of interest, within a specified time frame.
Sometimes even lenders also add interest or some charges to the principal values, which the borrower must repay including his principal value. There are too many types of loans available and there are also different tips or ways to get a loan.
What are the components of a Loan?
There are 4 major components available in Loan before going to borrow it.
1. Principal
Principal is the original and initial amount of money that you have borrowed or wish to borrow from a bank or financial institutions.
2. Interest Rates
The rate at which the amount of money owed increases, usually expressed in terms of an annual percentage rate.
3. Loan Term
Name says that Loan term is nothing but the total duration of the loan which the bank gives to borrowers that he has to repay.
4. Loan Payment
Loan payment is the amount that you should repay every month or quarterly or yearly with the interest in order to satisfy the terms of the loan. According to Principal value, Interest rates and Term you can calculate loan payments and make a table for your payment references.
Tips for getting a loan
1. Check your credit score
It is the easiest way to judge whether a person is eligible to get a loan or not. It is a numerical calculation of creditworthiness, based on his previous loan or credit histories. Delay in payments or bankruptcies are the main cause of your lower credit scores. Lenders often determine your creditworthiness. So, it is very important to maintain a healthy credit score during your loan term in order to get a decent loan amount in future.
2. Compare loan options
As we knew that every bank and their interest rates differ according to their terms. Comparing loan options is very important before going to take it and also go through its terms and conditions too. It includes cost of the loan, easiness to lenders meet their closing time frame and whether they offer fixed or variable interest rates. Remember your loan term will directly affect monthly payments and the total cost of the loan. Research and compare different lenders to find the best loan terms for your needs.
3. Income
Income is a vital point when it comes to getting a loan from any banks or financial institutions. If you need a large loan amount, then you need a certain income threshold in order to ensure that the borrower will not have any trouble sending or repaying the loan amount. Income streams include salaried employees, businessmen and Entrepreneurs. They may also require several years of stable employment in the case of home mortgages. Submitting the income source document is one of the processes under the loan approvals.
4. Interest rates
Interest is inevitable in loan payments, so it is very important to check properly how much interest they are charging on particular loans. Interest rates affect various aspects of your borrowing experiences like higher interest rates requiring more payments over the loan’s life. And you also see whether they are charging fixed or variable interest rates and whether it is a monthly payment or not. However loan eligibility and loan term is also required when it comes to interest rates. Remember sometimes economic factors like inflation, economic growth and Central bank policies may affect the interest rate of a loan.
5. Debt to income ratio
Debt to income ratio is simply a ratio of all your monthly debt expenses to your gross monthly income. Or it is a percentage of monthly income that goes around repaying your debts. It serves as an indicator to the lenders for how you will repay your money. Suppose if you have <36% DTI range then considered as a very good debt range and if you have <50% probably considered as a most dangerous DTI. In simple, higher level of Debt to income ratio considered as a borrower may have a difficult situation to repay the loan amount.
Types of loans
1. Personal loans
One of the unsecured loans where banks offer to borrowers amounts where he can pledge very less documents. Personal loans usually used for holiday plans, home renovations, wedding costs and medical treatments etc. Here borrowers need to repay in accordance with the agreed terms with the banks.
2. Home loans
Home loan is a sum of money borrowed from the bank or financial institutions mainly constructing or purchasing or renovating a home. The money is borrowed at a specific interest rate and repaid within a particular duration in smaller installments known as EMIs. There are different types of home loans available in the world like home construction loans, house renovation loans, home extension loans and plot loans.
3. Car loans
In simple Car loans defined as Loans borrowing from the banks or financial institutions to purchase a car or vehicle for personal or transportation purposes. One of the secured loans, usually having a lower interest rate when comparing other types of loans or credit cards. Car loans are classified as a new car loan, used car loans and loan against car.
4. Student loans
If you were once a student, you might have taken student Loans for educational expenses. Name says that student loans are given to people who are pursuing a bachelor degree or post-graduation courses. This loan helps students to bear their post-secondary education and its associated fees such as tuition, books and accommodation expenses. Interest rates here in this loan are usually more competitive and different repayment schedules to loan services.
5. Business loans
Capital is the life blood of every business and investment too. So without initial investment any business will not survive in the market. Therefore not all businesses have huge amounts of investment, therefore they will look to take a loan from banks. Business loans are nothing but people seeking loans to run a business, start-ups or companies especially for their operations and activities like salaries, rent, and machinery and equipment costs. Sometimes business loans also cover expanding existing business in some other cities and branches.
6. Secured loans
Secured loans are types of borrowing where the borrower provides collateral as a guarantee to the lenders. Collateral includes home, car, and other properties. Usually secured loans are less risky for lenders because they already received a form of securities, so therefore borrowers receive low interest rates and favorable terms for borrowers. Secured loans include Mortgage loans, car loans, home loans, business loans and gold loans and many more.
7. Unsecured loans
It is the exact opposite of secured loans and it does not require any collateral and typically based on creditworthiness. You can simply call it as signature loans, because all of your loan process includes more signatures or thumb if you meet the lenders’ borrowing requirements. Here lenders taking more risk suppose a loan which was blocked by the collateral. Therefore they are always charging higher interest rates. Unsecured loans include Personal loans, student loans and Credit cards.
Bottom line
Loan is inevitable in any form of business or basic stones to the financial economy. Loan is not just helpful to borrowers it is also useful to lenders too. Money with the interest lenders are able to provide funding for economic activities. Remember each of the loans are as its own terms and requirements. So, it is very important to choose the right type of loan that suits your financial needs and goals.