Loans

When it comes to talking about loans, it becomes confusing and downright terrifying. Loans are not something to fear, but they are something you should be educated and knowledgeable about since you are borrowing money. It is important to be aware of the terms and conditions you are agreeing to, as well as make sure you have the right type of loan for you. To start off, you need to know what a loan even is! There are also many different types of loans you can receive which makes the process not only perplexing, but overwhelming. Then, you have to think about applying for the loan and the different interest rates and factors that may play a role in their function and effectiveness.

What is a loan and why do I need one?

In finance terms, a loan is a sum of money that you borrow from the bank with the expectation you will pay it back with interest. You have to apply to loans and they background check your credit score and other information about you. (That is why keeping up your credit score & paying your bills on time is a necessity!) You apply for a loan when you wish to make a really large purchase that you could not pay in full on the spot. Most people pull out loans from the bank when they buy their homes, new cars, or even student loans to pay for tuition. 

Types of loans

There are SO many different reasons to pull out loans, as well as various ways certain loans function. The quick google search for “types of loans” is rather unsettling and unclear, which leaves you question unanswered. To break it down simply, the most common form of consumer loans are installment loans. These are when you borrow/are given a lump sum amount of money which you pay back over time usually in monthly payments + interest. The most popular installment loans are mortgages, auto loans, personal loans, and student loans. Mortgages are loans taken out to purchase a home, auto loans are for a new car, personal loans are for whatever you may need quick cash for, and student loans are to help pay for university fees (Check out our student loan blog for more information about student loans!) Each of these loans have a different potential for interest rates, as well as overall length of the loans. It takes longer to pay off larger sums of money! Although these are the most customary loans, there are many more obscure types of loans. These could be home equity loans, credit builder loans, payday loans, or pawn shop loans. Yet, the thing that changes the most when it comes to loans are the fees and conditions that accompany it. That's right… interest rates, payment requirements, and penalties!

Interest rates/special vocabulary

Each loan agreement you may agree to could be different than the previous one you signed. This makes choosing the best rates and what is right for you really difficult. Although there is no need to fear! There are a few easy things for you to check so you can find the best loan deal for you. First things first is you need to understand the vocabulary and meaning of the words used when negotiating a loan. Different loans will have different requirements on repairment (whether is monthly, bi-monthy, every 6 months, etc.) As well as various penalties for if you default on your loans, which is when you do not make your payments on time. One of the most commonly used terms when it comes to loans is their interest rate. An interest rate is a percentage of the loan that you pay in addition to the amount of money you borrow on the loan. So, if you have a 5% interest rate a year, it will cost you 5% of the original loan amount borrowed. These rates are normally paid back along with the original money you owe. This is so the bank/ whoever you are borrowing money from actually makes money from letting you borrow their money. These rates are normally given as an annual number, but not always so make sure you always double check. REMEMBER! *The dollar amount on the loan you pull out is not the exact amount of money you will pay back, you will end up paying more because of interest!* So, that being said you want to search for a loan with the lowest interest rate they will offer you. 

Fix rate interest vs variable interest rates & secured vs unsecured 

There are two types of interest rates, fixed rate interest will remain the same throughout the duration of your entire loan. Variable interest rates have the ability to fluctuate and change to adjust to the economic market. They are not as stable or consistent. 

In addition to the different interest rates, there are also secured and unsecured loans. Secured loans are typically when you have to put something (a car, savings account, etc.) up for collateral in case you do not make your payments those items could be seized from you. Unsecured loans do not require this collateral and are typically given when you have a high credit score. 

If you ever have questions, contact us - your expert consultants. 

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Solutions Team