What You Need to Know About a Loan
A loan is a sum of money that a financial institution or individual provides to a borrower. The borrower is obligated to pay back the loan amount plus interest to the lender within a specific timeframe, usually several months or years. The most common types of loans include auto and home mortgage, student, and personal loans. Lenders consider a borrower’s credit history, income and debt levels before deciding to lend them money. They may also require collateral to secure the loan, and they can offer both secured and unsecured options.
Some lenders have prequalification tools that allow borrowers to check their eligibility before applying for a loan. This is a great way to understand your odds of approval before you submit a full application, which can impact your credit score. You can also use a loan calculator to get an idea of your potential monthly payment and overall costs. Keeping in mind that the type of loan and term will impact how much you’ll end up paying, it’s important to review all terms carefully before committing to one.
Each lender has its own unique requirements for the information it needs from a borrower, but all lenders must verify identity and employment to ensure that borrowers can afford the payments on their loan. Most lenders will need a government-issued ID and documentation of employment or income, such as W-2s or paycheck stubs. Borrowers may also be asked to state the purpose of their loan and provide other pertinent details about the transaction.
Most borrowers choose to use loans for major expenses, such as purchasing a new vehicle or renovating a home. However, a personal loan can also be used to cover unexpected expenses or for debt consolidation. Before choosing a lender and loan type, be sure to review the lender’s requirements for the information it will need from you, such as credit score minimums and employment verification. It’s also a good idea to compare fees, such as origination and annual percentage rates (APRs), to make sure you are getting the best deal.
Some loans are open-ended, which allows a borrower to reuse the same funds over and over, whereas others are closed-end. Credit cards and lines of credit are examples of open-ended loans, while a mortgage or home equity line of credit is a closed-end loan. If you’re considering a revolving loan, such as a line of credit or credit card, be sure to check the lender’s restrictions on the maximum credit limit, and keep in mind that the balance must be paid off when you want to use the same amount again. For a closed-end loan, such as a mortgage or a personal loan, you’ll need to pay a set amount each month until the loan is paid off in full. The lender will receive a final payment when the loan is fully repaid, and then no longer have access to the funds in that account.