Loans: the complete and easy guide

Usually, when we want to satisfy our lives, needs or desires, but we have no money to do this, we go to a lending institution and apply for a loan. In finance, a loan is the lending of money by banks, credit unions, online lenders, credit card companies, etc. The borrower incurs a debt, and is usually liable to pay interest on that debt until it is repaid, and also to repay the principal amount borrowed.

Choosing the best loan isn’t as simple for most of the people, because there are many types of loans designed for different financial circumstances. Let’s take a look at the most important information you need to know before applying for a loan.

The different types of loans

There are many types of loans in the market. They have different features. Each of these features affect how much the loan costs and how long it will be before it’s paid off. These are some of the main types of loans:

  • Secured loans. They are backed by collateral, which can be seized by the lender if you default on the loan. Examples of secured loans include mortgages (secured by your house), car loans (secured by your car title) or other types of loans (secured by personal savings or another asset). Rates are typically lower than unsecured loans, as these loans are considered less risky for lenders.
  • Unsecured loans. They are not backed by collateral and this makes them riskier for lenders, which may charge slightly higher annual percentage rates. Examples of unsecured loans include personal loans, bank overdrafts, credit card debt, credit facilities or lines of credit, peer-to-peer lending, etc.
  • Demand loans. They are short-term loans and can be secured or unsecured. Typically, they do not have fixed dates for repayment and can be called for repayment by the lending institution at any time. An example of a demand loan is a bank overdraft.
  • Subsidized loans. They are usually only offered to those who qualify (demonstrate financial need or meet other criteria) and the interest is reduced by an explicit or hidden subsidy. Examples of subsidized loans include student loans, home loans, etc.
  • Concessional loans or soft loans. These are loans that are extended on terms substantially more generous than market loans either through interest rates below those available on the market or by grace periods, or a combination of these. Examples of concessional loans include loans made by foreign governments to developing countries, loans offered to employees of lending institutions as an employee benefit, etc.

Another way to subcategorized the loans is by the target market. So, if the debtor is an individual person, they are personal loans. Examples of personal loans include mortgage loans, car loans, home equity lines of credit, credit cards, instalment loans, payday loans, etc. If the debtor is a business, they are called commercial. Examples of commercial loans include mortgage loans, credit cards, commercial mortgages, etc.

Loans fees and costs

The amount you have to pay each month and in total over the life of your loans depends on the amount of the loan and the deal you get with the lending institution. The main fees and costs of a loan are:

  • Interest. It is charged as a percentage rate on the amount of the loan and it will affect how much you have to repay overall and what you pay each month.
  • Application fees. Typically, it combines the costs of processing, document preparation and review a bank or lender takes on.
  • Origination fee or disbursement or establishment fee. It can be rolled into the monthly cost of your loan or simply taken out of the amount you’re funded. It’s designed to cover the costs associated with your application process in its entirety.
  • Broker fees. Are charged, if you choose to bypass a direct lender and instead apply with a broker or service that connects you with multiple loan offers.
  • Early repayments fees. Are charged if you pay it off before the end of its term.
  • Closing fees. Generally, it includes a lender’s commission, a brokerage fee and other associated application costs.
  • Commitment fee. If you apply for a loan that won’t be immediately funded, you might face an extra commitment cost.
  • Late fees. Are charged if you don’t pay it by its due date.

These are the main fees and costs of a loan, but some lending institutions can charge other fees.

Loan application documents checklist

When you apply for a loan, you need to provide different documents. The list of the documents depends on your unique situation and on the type of loan you are applying for. Collecting these loan documents beforehand, can help you speed up the process and get to the closing table sooner. Here’s what you can expect to need when applying for a loan:

  • Photo ID, such as a driver’s license.
  • Copy of your tax returns.
  • Pay stubs or other proof of income.
  • Bank statements and other assets, such as savings, investments, insurance life, properties, etc.
  • Credit history statement, to explain negative items on your credit report, if applicable.

These could not be the only documents you need to apply for a loan, so you need to be ready to provide all the documents the lenders need.

Choosing a loan that is right for you

Choosing the best loan is not a simple problem, but it’s vital for your financial health that you make the right choice and don’t get overwhelmed by the options. There are some basic things to consider and analyse before choosing the perfect loan for you. Here’s the list of what you need to do before applying for a loan, so you can choose a loan that is right for you:

  • Understand loan options and features.
  • Understand loan costs and fees.
  • Understand loan application documents.
  • Make a personal financial plan.
  • Compare different loans offers.

Remember, it’s always best to have as much information as possible, before you apply for a loan.

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