How do Loans Work? — Know this Before Borrowing

A loan can either be a lifesaver or a disaster depending on what you make of it! Many people secure loans to finance purchases and services they can’t afford at specific times; however, if not properly harnessed, a loan can be a person’s worst nightmare. To avoid falling into this dilemma, you need to understand how loans work before borrowing money from lenders. So read on to learn the basics of loans.

Basic Loan Terms

You need to learn the key three terms associated with loans: Principal, Term, and Interest Rate.

Principal

A principal is defined as the amount of money you borrow from a lender with a committed agreement to pay back.

Term

This is the stipulated timeframe or duration that a loan is expected to cover. You are obligated to pay back the borrowed money within specified time frames. Note that term varies per lender and loan.

Interest Rate

Lenders charge their clients a specific amount for borrowing money, known as the interest rate. This amount is usually a percentage of the principal. It may also be calculated based on the rate the Federal Reserve charges financial institutions to borrow money from each other (known as the federal funds rate). Banks typically charge rates based on the federal funds rate.

Fees Associated With Loans

Most loans are given for a fee. The fees you have to pay in return for a loan vary from lender to lender. Notwithstanding, here are some common ones :

Application Fee: Fees charged for the process of approving a loan

Processing Fee: Fees charged for administering a loan.

Origination Fee: Covers cost of securing a loan (mainly applicable to mortgages)

Annual Fee:  This is a flat fee paid to the lender yearly ( This fee is typically reserved for credit cards).

Late Fee: Fees charged for making late payments

Prepayment Fee: This is generally applicable to home and car loans; this is the fee a lender charges for paying a loan off before term.

How do You Qualify for a Loan?

Before you get a loan, you have to prove that you are qualified to earn the loan. This is because lenders need assurance that you can pay back the loan. The key factor that most lenders use in gauging a client’s suitability for a loan is credit. Your credit gives a detailed history of your past loans and your repayment approach. A high credit score means you can be trusted with a loan, while a poor credit rating says otherwise.

In cases where your credit history is poor, or your debt-to-income ratio (amount of money you are borrowing versus the amount you earn) is dissatisfactory, you may get the loan with collateral. You give the lender a valuable asset to hold on to so they can sell it when you are unable to repay the loan.

How do You Apply for a Loan?

Every lender has an application process which typically entails providing information about yourself. However, bear in mind that some application and approval processes are more daunting than others. If you are looking for a hassle-free lender with the most straightforward application process, you might want to consider CashnGo. This is a unique lending platform that uses technology to simplify the process of obtaining loans. In addition, with this platform, you can get your loan approved within mere seconds! How amazing!

Keep this in mind……

Getting a loan is a “give and take” business. While you use loans to meet financial needs, lenders use them to make a profit. Hence, most lenders don’t give loans for free. Instead, you have to give something in return, such as collateral, or pay associated application fees. Also, some loans have complex schedules and payment systems, so without ample understanding and research, you could incur exorbitant interest rates, costs, and debt, defeating the loan’s original purpose.

Having proper knowledge and understanding of loans will help you make informed decisions about debt, improve your saving skills and maintain a good credit history.