How to Choose a Loan
A loan is a sum of money lent to an individual or business in exchange for future repayment of the principal value plus interest. It is often used to finance large purchases, invest in new projects or cover emergency expenses. The loans are typically issued by financial institutions like banks and credit unions or online lenders. In some cases, the lender may require collateral to secure the loan. These requirements are outlined in the loan documents. The main purpose of a loan is to help grow the overall money supply in an economy and open up competition by lending to new businesses. Loans are also a source of income for the lenders as they charge interest on the borrowed funds.
There are several types of loans, including personal, mortgage, auto and student loans. Each has its own unique features, but most have four primary attributes: principal, interest, installment payments and term. Understanding each of these can help people decide whether a loan is right for them.
How to Choose a Loan
There are many options for borrowing funds, from peer-to-peer loans to commercial mortgages. Banks are the most common lenders for consumer and small business loans. The application and approval process varies by lender, but generally includes an evaluation of creditworthiness, debt-to-income ratio and other criteria. Applicants should prepare documentation in advance, which can include proof of identity, pay stubs and tax returns.
A borrower can choose between a fixed and variable rate loan, which have different benefits and drawbacks. A fixed rate loan has a set monthly payment and a predictable interest rate, which is useful for budgeting purposes. A variable rate loan, on the other hand, can have a lower initial interest rate but can have higher monthly payments.
Some loans, such as home and auto loans, are secured by a lien on a physical asset. Others, such as student and payday loans, are unsecured. Borrowers must meet minimum criteria, such as a good credit score and debt-to-income ratio, to receive a loan. If a borrower meets these requirements, they will be provided with a contract term sheet for the loan that they must review and accept before receiving funds.
While there are numerous ways to obtain a loan, some are more risky than others. Predatory lending is one example of this, where an unlicensed and unregulated moneylender lends funds to borrowers without intending to repay them. Other forms of predatory lending include subprime mortgage-lending and payday lending. Predatory lending may be considered a form of fraud, as it allows for the unintentional acquisition of property by a borrower.