Getting A Loan

Written By: Traci Dillon on June 17, 2010 No Comment

Loans are financial instruments that involve the transfer of finances between creditors and borrowers. There is a variety of loan types. Some of the most common types of loans are personal loans, mortgages, payday loans and car loans.

The Lending Process

The loan process involves a borrower obtaining money from a lender. The amount of money borrowed is called the principal. The borrower has to pay off his or her financial obligations and interest rate on the loan at a later date. Loans are repaid in installments, meaning they can be paid monthly, quarterly, or in any other installment type specified in the loan agreement. The payment for each installment is usually fixed. The price for borrowing a loan is denoted under the term interest. Every month, the money borrowed increases at a fixed percentage in relation to the principal.

Loan Types

The two main types of loans are unsecured and secured ones.

Secured loans – represent loans which require collateral or a guarantee. Creditors have a greater degree of security that the debt will be returned when collateral is involved. Assets such as real estates, vehicles, or expensive jewelry may be used as collateral. A mortgage loan is one good example of a secured type of loan. A mortgage loan is obtained by borrowers to purchase a house. However, the lending company (mortgage company or bank) secures the loan via a lien on the property title. The creditor holds the right over the property and returns it to the borrower as soon as the loan principal and interest is paid off in full. Payday loans and car loans are other forms of secured loans. Car title loans are one example of loans that can be borrowed for a shorter period of time. A car title loan allows the borrower to receive easy money but at a greater risk, higher interest rate, and shorter payment term.

Creditors do not require a guarantee or collateral for granting unsecured loans. These are available at many financial institutions such as banks and credit unions. There is a variety of unsecured loans offered by financing entities. Credit card loans, personal loans, lines of credit, corporate bonds, and bank overdrafts are some of the most common types of credit. The applicable interest rates for these loans depend on the borrower and creditor. In the United States, borrowers with poor credit score may not be allowed to obtain unsecured loans. Unsecured loans are not granted against a collateral, provided that the borrower has proven income sources to repay them. The credit score of the prospective borrower determines his capacity to pay off the borrowed amount.

High Risk Loans

Some of the most notorious loans at present include payday loans and car title loans. Car title loans and payday loans share some common features. These short-term loans come with extremely high interest rate. Borrowers are given a month to repay before the loan builds up more interest and surcharges. The debtor has to pay the additional charges as soon as possible because they accumulate. High risk loans are a last resort option for individuals who desperately need money. Prospective borrowers should be aware that some companies are engaged in predatory lending.. This practice is a form of abuse, with the lender giving a loan in order to take advantage of the borrower.

Before getting a loan, you can check this free loan guide, brought to you by financial dictionary.