There are different types of money-lending means available to people today. Apart from the usual credit cards and other similar credit facilities, loans are some of the most popular forms of credit in the market. These loans usually fulfill a certain purpose, whether it’s buying a car, purchasing a home, or other personal reasons.
Loans are a powerful financial tool that help individuals get the financial stability they deserve. A more affordable alternative to credit cards, loans provide borrowers with the ability to equip themselves financially to make big purchases while saving money on interest.
Interested parties might find themselves being swept up by all the benefits loans can offer. However, it is critical that individuals have a clear idea of not only when they should apply for a loan, but also why they should do it in the first place. Read on to learn more.
- How a Loan Can Help
- Types of Loans Available
- The Right Time to Apply for a Loan
- Things to Remember When Applying
How a Loan Can Help
In simple terms, a loan is a type of credit that allows borrowers to obtain money from a lending entity or institution. This borrowed amount is then expected to be paid back after an agreed period of time by the two parties involved.
The loan amount is typically extended to an individual or another party provided that the amount will be paid back in full, including the initial value or principal amount and the interest accrued or finance charges levied on the loan.
A loan is a kind of debt incurred and undertaken by an individual or another similar party. These are mainly used to fund big purchases that borrowers would not be able to afford without the said borrowed amount, such as a home, a car, a trip, or even emergencies.
Depending on the type of plan or agreement that the lending institution has imposed, monthly (or bi-monthly) payments will be made by the borrower to pay back the loan. Most of the time, these payments are divided into two parts, particularly paying off the loan balance while the remaining portion will go to covering the loan interest.
How Loans Work
Before the loan is paid out to the borrower, the details of the agreement are outlined in a contract and are signed by both parties.
To get a loan, the interested party should first apply from a lending company such as a bank, government institution, a corporate entity, among many others. Borrowers will be required to provide personal information, as well as their financial and employment information, their Social Security number, among other details.
After submitting the relevant documents and information, the lender will review the applicant’s submission. These institutions usually take into account the capability of a borrower to pay back via their debt-to-income ratio, their creditworthiness, and other relevant details. If approved, the lender will dispense the agreed-upon amount.
Types of Loans Available
There are varying types of loans available depending on a user’s needs. The most popular loan is a personal loan. This is a versatile loan that can be used and allocated for different purposes, such as for education, medical emergencies and expenses, purchasing household-related appliances, or consolidating debt.
Besides personal loans, there are also car loans or auto loans. Based on its name, this type of loan can be used to purchase vehicles both used or new. For these types of loans, the term can range from 24 to 60 months, although there are other lending institutions that can provide longer terms.
A mortgage, on the other hand, is a type of loan that is primarily used for funding the purchase of a home. Mortgage loans make buying homes more accessible to individuals as it spreads the cost of paying for the home over a number of years. This type of loan is usually paid by borrowers over 30 years.
There are also student loans that are geared towards providing students with financial aid for their education. This can either fall under federal student loans which bear fixed interest rates or private loans from lenders. In addition, there are also small business loans that exist for companies in need, whether to pay for operational costs, purchasing a property, etc.
Finding the Best Loan
As you have seen, there are different types of loans available for borrowers and their extensive needs. But that is not all. In fact, there are also secured and unsecured loans. Secured loans have collateral to allow borrowers to obtain funding, while unsecured loans do not require any type of collateral.
Given these, one of the ways borrowers can find the best loan for their needs is to assess why they need it in the first place. Are they intending to buy a car, a house, or are they intent on consolidating their debt? Perhaps the best place to start is to ask what the loan will be used for. This way, borrowers will know what course of action to take.
After this, interested parties also have to bear in mind how much they need to borrow, and by extension, their capacity to pay for it afterward. Having a clear repayment plan is essential to prepare the borrower for the realities that they will have to face.
The Right Time to Apply for a Loan
As the article initially mentioned, loans are a type of credit. Borrowers may result to applying for a loan only when they have exhausted other means, such as failing to qualify for a low-interest credit card or if their credit card limits fail to meet their required needs.
Given this, it is safe to say that the right time to apply for loans is when borrowers have an immediate need for it, and by extension, when they have had the time to plan on how to pay for this accordingly. This way, borrowers can gauge their capacity to make good on their repayments and not fall into further debt.
One of the many reasons that individuals apply for loans is to consolidate debt. This allows them to combine and pay off other existing debts from other loans and or credit facilities in one payment, making payments easier to manage and keep track of. A loan’s lower interest rate gives borrowers a hopeful outcome knowing they can pay off their debt within a specific time frame.
Another right time to apply is when buying a big-ticket item. May it be a major household appliance to replace older models, purchasing a vehicle, covering the costs of a wedding, or simply paying off emergency expenses, loans exist to benefit time-sensitive money needs. Oftentimes loans can be disbursed in a quick and timely manner, allowing individuals to get their funds right away.
What to Consider When Applying
Weighing the pros and cons of loans before applying is a must. The total cost of the loan should be considered alongside its repayment terms. Borrowers are to pay on a monthly basis and between 1 year to 5 or 6 years depending on the plan.
In addition to the initial value, lenders often charge interest rates, as well as other fees such as sign-up or origination charges, as well as late payment fees. Because of this, individuals should see how these monthly repayments terms fit into their budget, especially with longer repayment terms coming with higher interests.
More importantly, borrowers may want to consider the current credit score they have prior to applying. Credit scores, and by extension, an individual’s creditworthiness, will be taken into account by lenders. Those whose credit errs on the fair or bad side may be subject to a higher interest rate.
Things to Remember When Applying
To help individuals prepare for their application when they are ready, interested borrowers should take the time to compare the varying loan terms extended to them by different lenders.
By shopping around, people can take a better look at the rates and terms of various loans, allowing them to get the best rate and option to suit their needs and situation.
For those who have a low credit score, boosting this and fixing any errors that are related to it would be a great help. Most problems when it comes to the application process stems from errors, so fixing this can prevent rejections in your application.
By regularly checking your credit score and ensuring it is at a favorable level, borrowers can get better interest rates.
Becoming a Responsible Borrower
Paying off loans on time and keeping tabs on monthly repayments isn’t enough. Being a responsible borrower entails that individuals understand the extent and parameters of their loan.
To clear off loans faster, users are not only urged to pay the interest as it accrues, but also to pay extra to help make a dent on the debt faster than the given timeline.
Lastly, don’t borrow more than what you need. While it may be tempting to borrow more to cover additional ground, getting more than one loan at a time can not only affect your credit scores and creditworthiness, it can also affect your finances. Take it one step at a time and keep your finances healthy.
The Bottom Line
There are many reasons why individuals take out loans. Taking out loans requires borrowers to be responsible for their payments and finances.
By doing their research first, borrowers can be properly equipped with the knowledge they need to know when the time is right to apply for a loan.
Disclaimer: There are risks involved when applying for a loan. Please see the bank’s terms and conditions page for more information.