Most people experience a time in their lives where they need to borrow a large sum of money. This can be for college, a house, car, or any other significant life event. Taking out a loan is a commitment, and the borrower should have a good understanding of the whole process. This overview provides a general guideline for taking out a loan.
Types Of Loans
A loan may be available for a specific situation, such as college tuition or buying a home, and borrowers should look at various types of loans offered, before deciding on each one. However, there are a few basic types of loans available.
Fixed Rate Loans
Fixed Rate Loans are the primary types of loans. This is a loan that has a fixed rate of interest that will not change through the duration of the contract.
Variable-Rate Loans are a type where the rate on the loan can change, depending on any market changes. These loans may have a cap on how high the rates can rise or how low they can fall over time. Remember that variable-rate loans often have a low interest rate, but that can increase over time, and you may end up with a high interest rate.
Installment Loans are typically available for mortgages. This is a loan that is repaid over a set period of time and has scheduled payments. The term of this loan can vary from a few months to many years.
Secured Loans are provided for people who may have low or poor credit scores. One example of a secured loan is a home equity loan. The borrower puts their home up as collateral. If they are not able to pay back the loan, then the lender will take possession of the house. Although the rates for this type of loan can vary, secured loans are often undesirable, as they can put a person’s needed assets at risk.
Unsecured loans are typically only given to borrowers who have high credit scores. This is a type of loan that does not require collateral. However, the interest rate for these loans can be very high and may not be worth the overall cost.
Qualifying For A Loan
In order to get a loan, potential borrowers should start by checking their credit score. Having a good credit score will make it possible to take out a loan, as lenders only want to loan money to people who can repay it. A good score ranges anywhere from 720-850. However, if your score is lower, that does not mean you can’t still get a loan.
The next step is to review lenders and the options that are available. Often, the best place to start looking for a loan is your bank or credit union. Depending on your financial needs, your bank will often provide the best rates. Loans for college tuition or a mortgage are usually best through a bank or credit union, and they may have other perks like finance classes or other aids.
Loans For Poor Credit Applicants
If you have poor credit, then you will likely have to take a secured loan. Some banks and financial institutions offer secured loans. Online Personal Loans are also an option, and they will often offer competitive loans for debt and home repairs. The process is fast, although loan rates can vary and may be higher than desirable.
Loans For Good Credit Applicants
If you have a reasonably good credit score and credit history, then you can take advantage of Fixed Rate or Installment loans. Once again, your bank or credit union will likely have the lowest interest rates. Meet with the loan officer to review your loan options. If you want to shop around, you can also take advantage of online lenders. A thorough credit history and rating will provide you with lower interest rates, although online lenders usually only lend less than $50,000.
Although getting a loan seems like a challenge, the best way to go about this process is to asses your personal financial situation, review your credit score, and then review your options for available loans. A better credit score usually results in a better loan, but even people with poor or minimal credit can still be eligible for a loan. Use this information to get started, and for the best results, make sure to avoid any scams or loans from poor or unknown sources.