- 4 Mar 2021
- Reading time
- 8 minutes
In the modern world, the concept of borrowing money is translated to the popular and often complicated business of loans. In the US alone, the student loan debt amounts to $1.71 trillion and grows 6 times faster than the economy. More and more people are borrowing money without any idea how to manage debt. Therefore, it is essential to learn the ins and outs of loans and how you can secure the best ones for a brighter future.
What are Loans?
The idea of loans originates from the age-old practice of borrowing and lending. Simply put, a loan is an amount of money that individuals, companies, and governments borrow from banks or other financial institutions to increase their funds. Depending on the type of loan, the money can be used for a variety of endeavors. However, upon taking the loan, the recipient incurs a debt that has to be paid back with interest within a given time frame.
There are many terms and conditions that the recipient and lender have to agree on before the final exchange. A lender may also require the borrower to give up an asset as collateral. While the funds can help borrowers attain financial stability, the fees and interest they incur are a source of revenue for the lender.
Why do you need a Personal Loan?
A personal loan is a type of loan that is typically borrowed for large expensive purchases, unplanned expenses, and more. Depending on the loan you choose and your financial circumstances, these loans have to be paid back in monthly installments over two to six years. Here are some common reasons why you might need a personal loan:
1. Debt Consolidation
Americans are racking up millions and trillions of dollars in credit card debt that is becoming impossible to pay off. Many people take out a personal loan to pay off credit debt. This practice is known as debt consolidation and it is one of the biggest reasons why people are applying for personal loans today. Find out more about debt consolidation and its benefits here.
2. Home Improvements and Repairs
As a homeowner, you must be well aware of how expensive it is to hire professionals for renovations and repairs. Some individuals choose to finance their home improvement projects through a personal loan.
3. Moving into a New Place
Shifting to a new place, especially one that’s in another state, can be an expensive endeavor. Personal loans can help finance the cost of transportation, movers, rent, and more.
4. Car Finance
Buying a car is a major financial decision that can put a dent in your wallet. Many individuals have to take out a personal loan to buy or lease a car. The advantage of going for a personal loan instead of an auto loan is that personal loans do not use your vehicle as collateral. If you want a deeper insight on personal loans and car finance then have a look at this guide.
5. Wedding Financing
Weddings are another great expense that can sometimes exceed your budget. Many Americans take personal loans to make their dream wedding a reality.
Key Elements of a Loan
Before you start searching for the right personal loan, it is essential to understand the different elements that you must consider. These elements include interest rates, term, and principal.
Principal: while it may sound like a complex term, principal is simply the original amount of money that you will be borrowing from the lender and will be paying back with the interest.
Interest Rates: the interest serves as revenue for the lender and is usually a small percentage of the principal. Loans have two main types of interest rates, fixed or variable. Fixed rates are unchanging. For example, if your interest rate is 5%, it will remain 5% for the entire lifetime of the loan. Variable rates change with time. They are based on a standard market rate.
Another important element is the term of a loan which is the timeframe within which a borrower has to pay back the loan. Typically, personal loans have a term of two to six years. On the other hand, some loans have longer terms that equate to higher interest rates.
Types of Loans
Now that you have a basic understanding of how loans work and their important elements, it’s time to explore the different types of loans.
Secured and Unsecured Loans
Secured loans are backed by collateral. This means that lenders will ask borrowers to present some documents to show ownership of their assets. Individuals can out up assets like bonds, stocks, and personal property as collateral until they pay back the loan in full. In case the borrower fails to repay the money, the lender can repossess the asset.
Here are some properties of secured loans:
- Usually used for loaning large sums of money
- Increases Lender trust and confidence
- Lower interest rates and strict borrowing limits
- Longer repayment periods
- Examples include mortgage and Car loans
Unsecured loans do not require any asset as collateral. However, to earn the lenders’ trust, borrowers must have a spotless financial status and record. Lenders closely assess the recipient's capability of repayment to make their final decision.
Here are some properties of unsecured loans:
- No risk of repossession
- Stricter criteria for financial status.
- Examples include student loans, personal loans, and credit card loans.
- Open-Ended and Closed-End Loans
Open-ended loans provide individuals the freedom to borrow again and again. The best examples of these types of loans are credit cards. Even though they have credit restrictions such as a credit limit. Individuals may choose to use a part or all of their credit limit. On every purchase from the credit card, the credit decreases.
Closed-end loans on the other hand do not allow individuals to borrow more until they have paid their previous loans. Borrowers with a closed-end loan will have to go through the loan application process all over again. Examples of closed-end loans include mortgages, student loans, and auto loans.
Conventional loans are often used for mortgages and refer to a type of loan that is not backed by government agencies. This type of loan is taken from private agencies and the borrowers are liable to pay the insurance. Conventional loans offer more flexibility for a borrower along with greater risk as they are not insured by the federal government.
Things to Consider Before Borrowing Money from Lenders
Now that you know what type of loan is best for you, it’s time to ensure that you secure this loan. This can depend on several factors. Here are some of the most common requirements that lenders assess to check your eligibility:
Credit Score and History
The credit score is an important measure that showcases how good individuals are at repaying their debts. A good credit history means that you have a higher credit score. This is the definite plus in lenders’ books and increases your chances of having your loan approved. A favorable credit score also increases your likelihood of attaining better terms.
Income also impacts the kind of loans you can apply for. If you’re an employee, you may have to present salary letters, pay stubs, and more to show your income. Self-employed individuals must submit tax returns and invoices for this purpose. Lenders use your income to determine whether you will be able to pay back the loan or not.
Loan applicants should pay special attention to their monthly financial obligations. If an individual’s monthly financial expenditure is almost as much as the income, the lenders might reject their loan application. This is why most lenders ask applicants to provide rent, utility bills, and other monthly expenses.
Why Looking for Online Loans is the Future
To appeal to the new generation of loan applicants, lenders are streamlining the application process and making it more convenient with the help of the internet. Whether it be looking for the right loans, comparing loan options, or applying for them, everything from start to finish can be done online these days.
Here are some major benefits of seeking online loans:
Faster and perfect for an emergency.
Easier application process.
Less strict criteria for loan approval.
Better terms than credit card loans.
Smaller interest rates.
You can read more about online loans in this article.
Tips for Finding the Right Personal Loans Online
If you’re wondering where you can find US loans online, there are many options at your disposal. While there is no shortage of choices, not all of them would be right for you. Here are some tips to find the ideal personal loan:
- Watch out for Payday Loans
While you’re searching for the right lender online, you will often come across loans that are short-term and have a high-interest rate. Don’t fall for their upfront rates and no credit check policies and be mindful of the risk they present.
- Try Peer to Peer Lending
Much like P2P marketplaces, P2P lending connects borrowers to lenders. These types of loans can be a good deal as they offer low-interest rates and flexibility as compared to the traditional lenders.
- Read Reviews from Loan Review Sites
When you’re looking for the best loan websites and opportunities, it makes sense to utilize online customer reviews. There are many websites that specialize in providing fair and neutral customer reviews to help you make the right choice. One such website includes US-Reviews where you can find reviews, ratings, and comparisons for multiple loan options.
Commonly Asked Questions About Loans in the US
Can you ask for a Mortgage online?
You can find many companies and banks that allow you to apply for a mortgage online. This allows you to fill the application at your own pace and choose the right option. Before applying for any mortgage, you may want to calculate mortgage rates with a mortgage calculator. Find more info on how mortgage rates are calculated in this guide. You can also read reviews and customer experiences of mortgage lenders online.