What Is a Loan?
A loan is a form of debt wherein the borrower agrees to pay back a sum of money plus interest within a specified time period. A borrower can take out a loan for personal, home or business purposes. There are several factors that lenders look at when evaluating loan applications including income, credit history and debt levels. A lender may also require collateral in some cases, especially for larger loans such as mortgages and automobile purchases.
In order to get a loan, you will need to submit a formal application. This process can vary from lender to lender and will typically include verification of your identity, employment and income along with documentation such as government issued identification cards, paystubs or W-2 forms. Many lenders will also perform a hard credit pull before offering you final approval which can cause your credit score to temporarily decline.
Once you have been approved for a loan, the lender will forward funds to you. The terms of your loan will be outlined in your contract, which will typically include the amount borrowed, loan term and repayment schedule. It is important to review these terms carefully so that you understand exactly what you are responsible for.
Some types of loans are secured by assets like cars or real estate while others are unsecured and backed only by your promise to repay the loan. Some lenders may allow you to add a co-signer to your agreement which can help boost the amount of money that you are able to borrow. In some cases, lenders may also require a down payment or other security to reduce the risk of a default on your loan.
The cost of a loan can be significant, so it is important to understand the terms and conditions before applying. Lenders will evaluate your application based on your credit profile and income level, but other factors such as location or features may also be considered. It is recommended to pre-qualify with multiple lenders to review rates, terms and fees before selecting a lender.
There are several different kinds of loans available including home mortgages, automobile loans and credit cards. The most common type of loan is an installment loan whereby you make monthly payments toward the principal and interest. In the case of a mortgage, you will often be required to pay an annual percentage rate (APR) on the amount borrowed which can increase the total cost of your loan.
Other types of loans include revolving lines of credit such as credit cards and home equity lines of credit which can be used over and over again while you continue to pay off the principal. Other unsecured loans are called payday loans and may have higher APRs than other types of loans. Predatory lending can take place in the form of loan sharks who may not be regulated by the state. This can include lending to individuals with poor credit who are not able to repay the loan.