Beginner’s Guide: How Do Loans Work?

Are you looking to apply for a loan? You probably should first learn how loans work so as to make the perfect decision when you get out there to borrow. The first step is to identify the kind of loan you intend to take so as to follow the right process of borrowing. Personal loans are like other types of loans and you are awarded the loan by a lender with an agreement to repay the loan within a specific period of time. To show you how loans work, here are some things you need to know.

Qualifying for a loan

Before you are awarded the amount you request for, you have to meet certain conditions that decide if you qualify for the loan. Lenders only lend you when they are sure you will be able to repay them, so things like your credit history will be considered to show how well you have been responding to repaying credit in the past. If your credit history is not good, you may be required to secure the loan with collateral so when you are unable to repay the bank simply sells the collateral to recoup their money.

The cost of borrowing

When a lender gives you a loan, there is the amount you pay on top of the money you are given. This is called interest and can vary from 1% to 30% of the loan depending on the amount you have borrowed and duration of repayment. The best advice is to see that you are able to minimize costs.

Use a spreadsheet to record the loan terms and interest amount then calculate the amount you will need to pay in interest by the time you will have cleared repaying the loan. Companies like Oink Money give you all the information you need to know before you apply for a loan. This transparency is important when borrowing and that’s why you should consider lenders who are open about the costs charged on the loan.

Paying down the loan

Once you are awarded the loan, you are given a grace period within which you will not be required to pay back the loan. After this period, you will then start sending your repayment installments, mostly on a monthly basis. A portion of the money you pay each month includes the interest, so you should confirm that the amount is something you can raise comfortably.

There are loans that are spread over a long period of time, say 30 years, and these will come with small monthly payments, so if you would like to pay small amounts each month, it would be advisable to consider an arrangement where the loan is spread over a long period of time. But you have to remember that such a plan will cost you more in the long run.

Understanding how loans work is necessary to ensure the decision you take while borrowing does not lead to problems. Know the amount of interest charged on the loan and negotiate for a repayment schedule that accommodates your earnings well. The trick is to ensure you don’t default as this could attract other costs.

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