Table of Contents
Whether you need money to buy a house, study at the university of your dreams, or put money towards a personal endeavor, you are bound to apply for a loan at one point or another. But wait! Do you have
Table of Contents
Whether you need money to buy a house, study at the university of your dreams, or put money towards a personal endeavor, you are bound to apply for a loan at one point or another. But wait! Do you have enough information?
This article is an overview for understanding loans, loan categories, interest rates, the game players during the loaning process, and the consequences of delay in repaying the loan. The information provided enables you to have a broad understanding of how loans work. That eventually helps to make informed decisions.
What is a Loan?
In the most basic terms, loans are essentially borrowed lump sums in exchange for future reimbursement against a sort of collateral. Lenders range from banks to credit unions offering a fixed amount of money called principal / the initial sum. Lenders often require an additional interest payment on top of the principal sum. The type of collateral used for getting the loan from a specific lender has an influence in defining the loan type. To put it another way, it is what borrowers pledge to get a certain amount that defines the category of the loan.
If we wink at the loan source for a moment and concentrate on the guarantor, loans are either secured or unsecured.
Secured Loans Vs Unsecured Loans
A secured loan is a loan that borrowers secure against an asset or liquefiable item they own. With this collateral, they pledge the return of the borrowed amount to the lender. Examples of secured loans include vehicle loans, mortgages, saving loans, secured credit cards, and life insurance loans. Depending on the desired amount and loan provider, the property you own, whether it is a house, vehicle or any type of valuables can serve as collateral. Life insurance, bank accounts, stocks, and bond investments can also serve the purpose.
On the other hand, unsecured loans do not require collateral the same way secured loans require. These loans sound easier to get and process. There is no commitment of a physical asset for serving as collateral. Examples include payday loans, personal loans, instant loans online, and personal loans for business use.
Now one may ask whether student loans are secured or unsecured. This is a critical question. One should note that even in the case of bankruptcy, student loans remain there for the borrower to repay. The collateral is the Federal Government that can follow many procedures to get the amount repaid. In all cases, in the absence of collateral, the unsecured loan approval is contingent upon the credit history and level of income.
Who are the Loaning Process Game Players?
Just like any game, the loaning process requires the participation of specific players. In games, participants enjoy competing against each other. Here, the story is different. For the game to be successful and enjoyable, one side should assist the other.
When John saved some funds from a project he executed, he wanted to invest in a new one. The collated amount was little. So, he decided to refer to the bank. Unfortunately, his query was rejected due to a lack of convenient collateral. He kept the faith, went online, did a good search, and asked an online agency to provide him with an instant loan. The agency checked the credit history of John, examined the savings he made as well as his income. Contrary to the bank, the online agency found John’s query beneficial for its success. Within a matter of hours, it accepted John’s proposal. The loaning process started.
Basically, once two differing parties’ interests meet, the exercise starts. It commences by the borrower in a close cycle with the lender. The loop goes on and on unless there is a delay in the repayment process. At this stage, other players, such as the credit bureau, may interfere to adjust the situation as a referee.
What is the Interest Rate?
Now that John received the loan, he needs to reward the loaning agency. Lenders, on the other hand, are not charitable organizations. They are just like us, trying to run a business and earn money. Therefore, they require compensation in exchange for their services and the cash amount they provide.
In fact, interest rates are an integral part of the loaning process. They come in the form of cash, real estate, or other consumer goods used as collateral. The calculation of the rate is based on many factors. These include the loan amount, the lending firm, the objective of the borrower behind loaning, the collateral, the credit history. It may also be influenced by employment status. One needs to remember that lower interest rates have an inverse relationship with high credit scores. Instant loaning firms offer John a better rate. He is high on credit score and has a previous story of business success. However, the rate, due to the absence of a physical asset, will probably be slightly higher than that usually provided by banks.
How is the Interest Rate Calculated?
Understanding interest rates on loans is really a necessity. John’s $10.000 instant loan comes with a 5% annual interest rate. His monthly interest rate amounts to roughly 0.4%. While this seems reasonable, interest rates may also entail three areas of complications worth considering:
- Not all interest rates come in a fixed amount. Some may be riskier t