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Loans can be extremely helpful in a number of situations when you need more funds to satisfy particular financing needs. You may need additional money for buying a new house or car, paying off a wedding, paying down medical bills, financing further education, starting a small business, or perhaps consolidating a debt.

Finding a Loan

In many cases, taking out a loan can be a very useful endeavor, as it can help you stay financially stable. However, finding the right loan can be a bit overwhelming, as there are many factors to consider. It can be especially daunting if you’re doing it for the first time.

Choosing a Loan

To choose the right loan for your needs, you need to know what options are available. You also need to dig deep into interest rates, APRs, the importance of good credit score, and much more. Read on to learn everything you need to know about loans.

Loans 101 – Everything You Need to Know About a Loan

To get approved for a loan, you need to know how you can actually qualify for a loan. To do that, you need to know your way around loans, and fully understand all the terms and factors that come with borrowing money from a bank or credit union.

General Definition of Loans

A loan is a lump sum of money that you (the borrower) borrow from a particular entity (the lender) with a guarantee that you will pay it back in full after a specific period of time. You can pay it back all at once, or you can provide regular installments over time. Either way, you pay your loan back with interest.

This means providing a particular amount above repayment of the amount you borrowed, at a specific rate (interest rate) set by the lender.

Depending on the loan you choose, you may have to provide a down payment, or you may choose to do so even if it’s not required. Providing a down payment instantly reduces the interest amount you have to pay over time.

Getting a Loan with Bad Credit

Getting a loan with bad credit may be a bit difficult, but it’s not impossible. There are many lenders who offer options for people with a low credit score, while others may approve you only for a secured loan. However, you may also choose to apply for a loan with a cosigner.

The cosigner needs to have good credit and/or a very high income. This can be risky for the cosigner because they certainly wouldn’t want you to default on your loan. If you do, they would be the one paying off your loan instead of you, not to mention that their credit score would be negatively affected.

Therefore, if you choose this option, make sure you’re absolutely certain that you can provide on-time, full payments. You should also ask only the closest friends or family members to cosign a loan with you.

Of course, you can always postpone getting a loan to work on improving your credit score. You can raise your credit score within several months, when using credit reporting cards or secured credit cards, but building a really good score may take a bit longer, depending on your unique situation. If your need for a loan isn’t an emergency, take the time to rebuild your credit score, so that you can get your loan approval.

If you opt for getting a loan with a cosigner who has a healthy credit score and income, you may be able to get a lower interest rate. Consider this if you have bad credit, but you’re in a hurry to get a loan.

Loan & Credit Score

Your credit score plays a huge part in your loan approval. If you have a bad credit score, obtaining a loan can be quite difficult.

Your credit is based on your previous debt payments. If you’ve always paid your bills on time and in full, paid off your credit card balance and any loans on time and in full, you probably have a good credit score.

Even a single missed payment can hurt your credit score. And even minor slipups stay on your credit history for 7 years. Even just applying for a loan can affect your credit score, albeit only by a few points.

Therefore, when and if you get your loan approval, make sure you always provide on-time, full payments. You’ll improve your credit score, and not risk defaulting on your loan.

If you think that there’s even the slightest possibility of you not being able to repay your loan, refrain from taking it out.

You don’t want to get in debt that you can’t payback. Moreover, you would greatly hurt your credit score. Instead, consider other alternatives, such as secured credit cards, for instance.

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Loan & Interest Rate

An interest rate is a percentage of the total sum of money you borrow from a lender. It’s the amount you need to pay to the lender above repayment of the principal sum. Think of it as a fee that you pay on an annual basis for the lender’s services.

Your total interest rate will depend on the amount of money you borrow, the type of your loan, any potential down payment you provide, the repayment period, your income, and your credit score.

Fixed vs. Variable

You can choose between Fixed and Variable interest rates.

A fixed interest rate will remain the same for the entire term of your loan.

In contrast, a variable interest rate will change over time, and it can go both up and down. Variable-rate loans usually have lower interest rates.

Loan & APR

An APR, or an Annual Percentage Rate, includes your interest rate payments. It also includes all the other annual fees that you need to pay. Those fees can include origination fees, that is, fees for filing paperwork for getting your loan. They can also include closing fees and any other annual fees that your lender charges for their services.

Make sure you check the APR when considering a loan. An APR is a much better representative of the total cost of borrowing than an interest rate. It will show you the exact amount you need to provide per year so that you can know whether or not you can actually afford the payments.

If two loans come with the same APR but have different repayment periods, then they come with different costs. The one with the longer repayment period will have higher interest rates.

Different Loans For Different Needs

Every loan is designed for a specific purpose. Each comes with different interest rates, repayment periods, and many other factors that you need to consider. Depending on your needs, the most common types of loans you can choose from include personal, auto, student, mortgage, and small business loans.

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Secured vs. Unsecured Loans

Secured loans, also known as Homeowner Loans, are loans that require collateral from a borrower. Collateral can be a cash deposit, a home, a car, stocks, or any other valuable asset. Even if you don’t place your home as collateral, you still need to be a homeowner to qualify for a secured loan. If you default on your loan, that is, fail to provide timely and in-full payments, your lender will seize the collateral.

It’s much easier to get approved for a secured loan, and the interest rates are lower. You can get it even if you have a poor credit history. This is all because the risk is lower for the lender. In case of a loan default, they have your collateral to fall back on.

On the other hand, unsecured loans don’t require any collateral. They do require a good to excellent credit score, and their interest rates are higher.

They’re higher precisely because the lender has no asset to rely on. You can get approved only with information about your credit history and income. If you default on your loan, the lender loses money and has no collateral to fall back on. They can only resort to a lawsuit or debt collectors.

However, an unsecured loan allows you the flexibility of choosing your repayment period.

If you need to borrow a larger amount of money with a repayment period longer than 25 years, then a secured loan is your way to go.

So, if you can qualify for an unsecured loan, and need a smaller amount of money that you can repay in 2-10 years, make sure you always provide full payments on time.

If you can’t afford the payments, you can consider extending your repayment period. That way, you’ll reduce your monthly payments, but you’ll also deal with a higher interest rate. Consider all your options wisely.

How Do I Get Approved for a Loan?

When looking to take out a loan, the last thing you want is to be denied. As already mentioned, to get approved for a loan, you need to make sure you have a good credit score.

7 Steps Guide To Get A Loan

1. The first step you should take is to check your credit report for any potential errors. Mistakes happen, so you don’t want any potentially inaccurate information on your report to be the reason your loan application gets denied. Therefore, contact the major credit bureaus to check your credit report before applying for a loan.

2. If you use credit cards, your credit utilization ratio will also greatly affect your chances of loan approval. You need to maintain a good credit utilization ratio, that is, always pay off your credit card balances on time and in full.

3. Keeping your old accounts open, even if you paid them off, will also improve your credit score. That’s because you’ll increase the length of your credit history.

4. If you have any debts, be sure to pay them off before submitting your loan application. You’ll have a higher chance of approval, and a better credit score.

5. Your income also plays a huge part in your loan approval process. If you have a steady job, your lender will feel more comfortable lending you their money, because they will see that you can actually afford to pay it back. Therefore, don’t switch jobs if you plan on taking out a loan. Show that you have a steady income that allows you to pay back what you owe easily.

6. Always use less than 30% of your total credit limit every month. That will show your lender that you’re a responsible and trustworthy borrower, and it will improve your credit score.

7. Also, never miss any payments you have. A single missed payment can be devastating to your credit score, and limit your chances of loan approval.

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What Is Debt-to-Income Ratio?2019-10-25T05:17:47-05:00

Debt-to-income (DTI) ratio is used to determine whether or not a borrower can provide on-time, full payments every month to pay off their debt. A lender calculates this ratio by looking at a borrower’s income and spending habits, and the amount of debt they carry. It will be much easier to approve you for a loan if you have a lower DTI ratio.

What Is an Interest-Only Loan?2019-10-25T05:13:17-05:00

An interest-only loan is designed for the most qualified borrower. You must have an excellent credit score and a very high income to get approved for an interest-only loan. With this loan, you can postpone paying off the loan, and only pay the interest rate.

What If I Miss a Payment?2019-10-25T05:18:48-05:00

If you fail to provide a loan payment on time and in full, your lender may offer you a grace period to provide your missed payment. This is also known as a delinquent loan, and the grace period allows you to get out of the delinquency stage.

If a certain period of time passes and you still don’t provide your missed payment, you greatly increase the risk of loan default. Both delinquent loans and loan defaults can severely affect your credit score.

What Is Loan Amortization?2019-10-25T05:16:06-05:00

Loan amortization is a process of spreading out your loan payments over a set period of time to pay off your principal sum and the interest rate in different amounts every month. All your monthly payments stay the same, but their parts (the principal sum and the interest rate) change over time.

At the beginning of your repayment period, you’ll pay higher interest costs, which will decrease over time. When it comes to the principal, the amount to pay will be lower at the beginning, while increasing over time.

The most common types of amortized loans include mortgage, auto loans, and student loans.

What Are Installment Loans?2019-10-25T05:12:18-05:00

Installment loans are loans that have a fixed repayment period. You need to repay an installment loan by providing regular installments in fixed time intervals. The most common types of installment loans are personal loans, auto loans, and mortgages.

What Is Loan Refinancing?2019-10-25T05:19:32-05:00

If you have one or more loans that you have trouble paying off, you may turn to loan refinancing. When you refinance a loan, you can get lower interest rates. You can also reduce the amount of money you need to pay back. You can also use refinancing to get a chance to pay lower monthly payments over a longer period of time. However, this would increase the total amount you need to repay.

What Are Cosigners and Co-Borrowers?2019-10-25T05:20:16-05:00

A cosigner is a person who guarantees that they will repay your loan if you fail to do so. They help you get approved for a loan due to their excellent credit score and high income. A co-borrower, also known as a joint applicant, is someone with whom you get and share a loan, together with all the responsibilities for repaying it.

What Is Loan-to-Value Ratio?2019-10-25T05:16:53-05:00

Loan-to-value (LTV) ratio is used for determining the size of a loan. A lender calculates the LTV ratio based on the value of the asset that you want to purchase with the loan. This ratio is commonly used to determine the value of auto loans and mortgages.

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