Shopping For a Loan
A loan is a sum of money borrowed by a borrower that must be paid back with interest within a specified time period. Loan terms are typically outlined in a contract between the lender and the borrower, which includes loan principal, monthly payment amount, annual percentage rate, fees, and term length. When shopping for a loan, it is important to understand loan terms so that you can compare offers and choose the best option for your needs.
The term loan can refer to any type of financing arrangement between a borrower and a lender that involves the lending of funds in exchange for future repayment. Typical types of loans include mortgages, auto loans, personal loans and credit cards. Loans can also be described as secured or unsecured, with the latter usually involving an open-ended line of credit up to a certain limit. The most common way to obtain finance through a credit is with a credit facility or line of credit arranged through a current account, which allows deposits and withdrawals up to an agreed limit.
Generally, lenders offer loans in response to demand from customers. When deciding to lend, they will take into account a variety of factors, including the customer’s credit score and debt levels. They will also consider their own risk tolerance, which is a combination of the potential loss they may incur and the cost of providing the loan.
While the primary purpose of a loan is to provide a lump sum of capital to a customer, many lenders use it as a marketing tool by advertising their competitive terms and features. This often involves offering a lower interest rate than the competition or offering other incentives such as low upfront fees. Borrowers are advised to carefully survey competing offers and to seek out the advice of a financial planner or attorney before taking on a loan.
One of the most important aspects of a loan is the interest rate, which is the additional sum that a borrower must pay in addition to the principal amount. This is a major consideration when choosing a lender, as it can dramatically impact the total cost of the loan. Interest rates are usually based on the borrower’s credit score and the type of loan being offered. They can be quoted as an annual percentage rate (APR) or a simple interest rate.
When selecting a lender, it is also important to consider whether the lender will require a credit inquiry as part of the application process. Most lenders will run a soft credit inquiry when checking for pre-qualification, which does not affect the borrower’s credit report. However, when a borrower completes a full loan application, they will be subject to a hard credit inquiry that can lower their credit score. Lenders should be transparent about this and not lie to borrowers about the impact of an inquiry on their credit. They should also clearly state whether any additional fees or charges will be included in the loan.