What Is a Loan?
A loan is an amount of money borrowed from a lender, which borrowers must repay, along with interest. Loans can be secured, where the borrower pledges an asset such as a house or car, or unsecured, in which case the lender bases the decision to lend on the borrower’s creditworthiness. Loans may also be fixed or revolving, the latter of which offers flexibility in borrowing funds on an as-needed basis.
Before taking out a loan, it’s important to know how much you need and what your repayment terms will be. Borrowing too much can lead to debt issues that can be difficult to manage. For larger expenses like a new car or home, loans can provide the necessary lump sum needed to make a one-time purchase. For smaller expenses, lines of credit are often more convenient since they allow you to borrow funds as you need them without incurring the full interest costs of a loan.
When shopping for a loan, it’s important to compare fees and rates. A loan’s annual percentage rate, or APR, takes into account the interest charged on your balance, plus any upfront charges such as origination fees. You can find APR calculators online to help you determine the cost of different loan options. When comparing lenders, it’s best to focus on the lender’s interest rate, as this will be the largest expense of the loan.
Some lenders offer specialized lending programs for those with specific needs or who may have difficulty qualifying for an unsecured personal loan or line of credit. For example, some specialized loans are available to military veterans or those with medical conditions. Some lenders may also offer a reduced APR to borrowers with excellent credit scores.
Another option for those who may have difficulty obtaining a loan from a traditional lender is to seek financing from a peer-to-peer (P2P) lending site, which connects individual investors with borrowers looking to fund projects or purchases. Peer-to-peer lending typically involves less paperwork than a conventional loan application and can be processed faster.
A loan can be used to finance a wide variety of purposes, including home renovations, debt consolidation, business ventures, vehicle purchases and more. Most loans have certain terms that must be mutually agreed upon by both parties before funds are disbursed. For example, a creditor may require that a borrower have a minimum income threshold in order to approve a mortgage or other large loan. Likewise, a spouse who co-signs on a mortgage must be willing to assume responsibility for the debt and take title to the property as well as occupy the residence.
For borrowers with less-than-stellar credit, finding a loan can be challenging and may involve hefty interest rates. Some alternative sources of financing include crowdfunding sites such as GoFundMe or Kickstarter, which enable people to raise money for a project of their choice in exchange for a small fee. They can also seek funding from family and friends, or from peer-to-peer lending sites.