Nowadays taking a loan is no more a hackle but you should know what a loan is and how the formalities work.
Loan can be defined as borrowing a sum of money from banks or financial institutes in order to manage planned or unplanned events. In the process the borrower has the pay back the same amount of money with interest to the lender in a given period of time.
All the terms and condition should be accepted by both the borrower and the lender. The lender sometimes requires the borrower to offer an asset up as collateral.
Any individual, corporation or government can apply for loan.
Types of Loans
Loans can be classified into secured and unsecured, open-end and closed-end and conventional types.
- Secured and unsecured loans
There are secured and unsecured loans.
In secured loans, it is backed by any kind of collateral. Most financial institutions require borrowers to present their documents that show ownership of an asset, until the loan is repaid.
Lenders are not always willing to lend a large amount of money without any collateral, so the collateral is kept as a form of guarantee to the lender.
In unsecured loans, it is not important to back by any kind of collateral. The lenders are very thorough when checking the borrower’s financial status. This way, the lender will be able to check the capacity of the borrower of repaying and decide whether to allow the loan or not.
- Open-End and Closed-End Loans
There are open-end and closed-end loan.
In open-end loans, the borrower has the freedom to borrow over and over. The perfect example of open-end loans is credit cards and lines of credit.
In closed-end loans, the borrower don’t have the freedom to borrow again until the before borrowed money is repaid. In the process one has to present documents to prove that they are credit-worthy and waiting for approval.
- Conventional loans
It refers to the loan that is not assured by any government agencies. This term is often used when someone is applying for mortgage.
Things to consider before applying for loan
If you are applying for a loan there are a few things that you should consider before doing it .
- Credit Score and credit history
Getting a loan approved highly depends upon the good credit score and credit history of a person. It helps to prove to the lender that he/she is capable of making repayments on time.
If the credit score is low, then there will be very less possibility of getting your loan approved. But if you are having a good credit history then it will be very easy for you to get a loan.
- Income
Before applying for any kind of loan, you should always check another aspect that is evaluating your income. One have to submit pay stubs, W-2 forms and a salary letter before applying for the loan.
Whereas if you are self-employed all you need to submit is a tax return for past two or more years.
You should also keep another thing in mind that is monthly obligations.
So keeping in account these few points before applying for a loan can help you out for sure.
Just don’t forget to do some research and choose the one that suits you the best without being a burden on you.