Almost 45 percent of this amount is focused on refinancing, which means that Americans are in huge debt. Partially, the reason is that people aren’t aware of the loans’ nature. In this guide, we’re to tell you about the most important things about personal cash loans.
Note that the following info is general. Exact terms and conditions may vary greatly depending on the country of residence, the chosen lender, and the borrower’s status. You want to conduct extra research before applying for a loan. Don’t borrow money until you fully understand how the lending institute works and what consequences it has.
Now, let’s proceed to the topic!
Loans and How They Work
The most basic thing to start with is the concept of lending. Many years ago, one person gave a certain sum to another person and asked them to return it with an extra fee. That was the first moneylender, and he or she provided the first loan ever.
Traditionally, we consider a loan to be a certain amount of money that is granted to an individual or an entity by another individual or entity. This amount must be returned within the predefined period. Additionally, a borrower must return interest—the percentage of this amount that acts as a lender’s reward. Usually, the total sum that must be returned is split into several transfers. There are daily, weekly, and monthly models of repayment.
The Most Popular Loan Types
Lenders often list dozens of loans with different conditions. Thus, we can classify them by several factors and features. Let’s begin with two of the largest categories:
- Business loans. Available for enterprises only. It can be used for different goals.
- Short-term loans. Quick investments or protective measures.
- Mid-term loans. Moderate strategic development.
- Long-term loans. Slow growth with global objectives.
- Personal loans. Available both for individuals and entities. Goals are various, too.
- Auto loans. Used to get a new car or improve the existing one.
- Home loans. The same thing but for the property.
- Mortgages. Exclusive offers to purchase a new house.
- Multi-purpose loans. General type for everything.
- Student loans. Education-focused offers.
- Debt consolidation. New loans to pay the previous ones.
All of the mentioned types also can be secured or unsecured. Loans for which you should provide collateral often come with better parameters, like a higher amount or lower interest. On the contrary, unsecured loans are easier to get. Finally, loans differ by the lender so you can get a government-issued offer or support from a private group.
Key Insights into Cash Loans
Well, so what’s important to know before you apply for any loan? Apart from obvious things like the lender’s reputation, eligibility criteria, and interest rate, there are more things to be aware of. Be sure that you explore each offer carefully before getting it.
1. APR and Total Cost
Let’s say, your application has been accepted. Congratulations! But be extremely careful about the last step – signing the contract. After you put your signature, there will be no way back. Thus, always check all the conditions before this step.
Firstly, calculate the Annual Percentage Rate (APR) and the total repayment. Let’s look at two examples:
- $10,000 loan at five percent APR for five years. The monthly transfer will be $188.71. However, the total return will be $11,322.74.
- $10,000 loan at six percent APR for three years. The monthly transfer will be $304.22. However, the total return will be $10,951.88.
Here, you should choose between a longer-term with a higher total cost and a shorter period with lower payments. It depends on your goals and opportunities always. Just don’t forget to calculate.
2. Hidden Fees
Apart from the previously mentioned things, you always want to check out the contract for extra fees and penalties. Surely, do this before signing. Here’s the list of points to look for:
- Early payment fee. A lot of lenders charge borrowers when they return the entire amount before the final due date.
- Failed payment fee. Some companies list penalties for rejected transfer. Say, if you want to make a payment but don’t have enough funds on the card.
- Late payment fee. Nearly all lenders require fees for late transfer after the due date. Moreover, it will affect your credit score.
- Origination fee. Mortgage loans most often include this point. It means that the total amount will be reduced by the fee’s amount taken for processing.
Also, some illegal companies may require an initial fee. Never work with these lenders as they are frauds, most likely. 99 percent chance that you will not receive the money after sending a prepayment. And a one percent chance that you will get funds, but your personal details will be stolen.
3. Credit Score
We hope that you are aware of your credit score, because MoneyTips found out that 30 percent of customers don’t know their rating for this metric. As credit score is crucial for getting loans, we highly suggest checking it and remembering. You can use governmental financial bodies to find it or contact your bank, for instance.
Apart from the importance of a high score for the best loan terms and conditions, it can be greatly affected by the lending process. It’s obvious that late payments decrease it. The later you pay and the higher your debt is the worse your score will be. But also remember that application for a loan also lowers the score by a few points. It’s called a hard inquiry.
4. Extra Funds for Repayment
Okay, let’s go to advanced things. It’s clear that you should be able to return the full amount to avoid credit score decrease and other problems. But not everybody knows that they should opt for a reserve. Say, you want to get a loan with the total repayment $9,500 and estimate to earn $10,000 by the repayment term. Now imagine that you accidentally hit the neighbor’s car and must pay $1,000. This situation will result in debt.
The catch is to always have a so-called financial safety bag. Ideally, it should be twice as much as the final repayment. You can say that it’s easier to spend this money instead of getting a loan. But don’t forget that loans with on-time repayments improve your credit score and reputation!
5. The Importance of Purpose
The last thing to talk about its purpose. There are bad goals and good goals. Respectively, you should take loans for good goals and avoid bad ones to get the best results. Let’s say you want a new car. Will it help you to earn money? Maybe you need it to get to work? Or you are a taxi driver and need own car? Then get this loan. But be sure to reject it if you just want a car, without a direct influence on your profits.
The lending concept is pretty simple. Borrowers get money and then return amounts plus interest. Simultaneously, the lending concept is full of pitfalls and nuances. There are hidden fees, limitations, illegal market players, and ratings. Actually, you always have several alternative options to finance your expenses. And if you choose loans, be sure to study them carefully.