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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.
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.
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.
Loans FAQs. What People Ask about Loans
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.
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.
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.
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.
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.
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.
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.
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.