Basic Things Every Borrower Should Know Before Getting a Loan
People take loans for various reasons. A personal loan can actually be a useful method of affording unexpected costs such as home improvements, repairs or essential items that need replacing. Sometimes you can have the willingness to accomplish something in life but you pocket does not allow you. This may be very challenging and that is the reason why you can opt to take a short term loan or a long term loan. Banks and even cooperatives issue loans to customers as long as they are eligible for the loans they are requesting. This way, individuals are saved the agony of soliciting funds from their fellow colleagues and can manage to undertake what they desired with a lot of ease. However, there are some basic things that you as a loanee should know before getting a loan. They include the following:
- Annual Percentage Rate (APR)
This refers to the annual rate that is charged for borrowing which is normally expressed as a single percentage number that represents the actual yearly cost of funds over the term of a loan. The annual percentage rate is intended to allow a customer to compare the interest rates of different types of loans. It’s important to remember that the interest rate for your loan is largely based upon your personal credit score. If you have experienced credit problems, then you should expect a higher interest rate. For loans for people with bad credit, it’s not uncommon for interest rates to be greater than 20%. On the other hand, for people who have excellent credit, the interest rate will reflect that, many lenders offer loans for good credit at less than 10%. If you happen to be one of those with bad credit, it might be a good idea to take out a loan regardless of the interest rate, make a habit making your payments on time, and in a year or so, you could refinance your loan at a lower interest rate.
- Balloon Payments
You may decide to take a loan to enable you purchase a car. When you are negotiating for a car loan with your financier, one of the vital decisions that you may be faced with is whether you wish to have a balloon payment on the loan. Instead of spreading the full vehicle price over a normal finance period like six to seven years, you opt to defer a certain percentage, say 40% of that lump sum to the end of your finance period. This then allows for a much lower monthly installment during the normal finance period, but you will still face the 40% “balloon” payment at the end of the loan term. The maximum balloon payment is not homogeneous. It is subject to various factors for example; the age of the car, the loan term and the borrower’s financial profile. It is very advisable to have some knowledge on balloon payments when taking a car loan.
- Loan Term
Different types of loans have different loan terms. Some require you to pay within a short period of time for example one to three weeks, like a payday loan, while others require you to pay for longer periods. Mortgage loans have longer periods of payments. They may take twenty to thirty years to get repaid, as where a car loan or Personal Loans for Bad Credit – ARCCT may take only three to five years to pay off. The nature of the loan you are about to take determines the amount of time you will require to service the loan.
- Total Amount Owed
This refers to the amount the loanee should pay the lender at the end of the agreed period. This amount comprises of the initial amount that the loanee borrowed plus the interest charged. There are different types of interests charged on loans. They are simple interest and compound interest. The interest is calculated separately and then added to the initial amount borrowed. That combined, makes up the total amount owed by the loanee to the lender.
- Monthly Payments
This refers to the amount that the loanee is expected to pay to the lender at the end of the month. You can have arrangements where you will be crediting the account of the lender at the end of each and every month up to when you complete servicing the loan. This is normally convenient for those people who like paying small amounts of money over longer periods.
Those are some of the basic things that you should know before getting any type of loan, whether it is a personal loan, car loan, payday loan, mortgage loan, or even a debt consolidation loan. All loans, especially loans for bad credit or people with a low credit score, should be used wisely so that they can give expected returns after a certain period of time. You can decide to invest in a business where you will be getting profits. You can use these profits to service that loan that you borrowed. You can invest in dairy cattle where you will be selling milk in large quantities thereby making profits. Personal loans have actually helped people create their own jobs thereby being their own bosses. This has boosted the entrepreneurial spirit among the youths thereby reducing unemployment. This is why you need to be wise when deciding to take a loan. Ensure you have the basic things that have been discussed above and you will not regret taking a loan. It will also save you the agony of being harassed by the lender.