These days, loans can be accessed easily from banks and private lenders. Basically, there are different kinds of loans – unsecured and secured loans. Unsecured loans are borrowed money that needs collateral and may require you to present bank statements, proof of address, and income proof. On the other hand, secured loans are cash you can borrow so that you can mortgage your properties, and you may access them with low interests.
Basically, there are various ways of how you can use these loans. You may use them to finance your business, buy a property from a real estate platform like movoto, consolidate debts, and fund emergency issues. When applying for either unsecured or secured loans, you’ll have to consider some factors like the ones discussed below.
⦁ Credit Score
Most lenders use credit scores to determine how borrowers can pay their loans back. People with low scores are termed as risky borrowers, and may not qualify for a loan even when their cash flow is good.
On the other hand, high scores translate to loan approvals with low-interest rates. Therefore, before you apply for a loan, be sure to check your score. In case it’s below the required score, take some measurements to improve it in six to eight months before applying again.
⦁ Collateral
Collateral is anything you own, which the lender may take in case you fail to honor your repayment contract. It may also be an item that holds value. Lenders can accept it to serve as an alternative way of repaying the loan.
However, the value terms of collateral depend on loan requirements. For instance, if you want an auto loan or mortgage, you can use your car or house as collateral, respectively.
⦁ Interest Rates
Interests are the costs you incur when you use the money of another person, and may also accrue when you apply for a loan. There are various ways of calculating interests – some of them are profitable to lenders. Therefore, the decision to pay these interests is based on the profit you make.
On the other hand, banks and other lenders have the freedom to decide the rates they will impose on loans and deposits. With many microfinance institutions in the market, there are competitive interest rates, so you’ll have many options.
⦁ Hidden Charges
A home loan is an example of borrowed cash that has a lot of hidden charges. Some of these charges neither have regulations nor guidelines, but they differ from one bank to another. These charges are mostly included in the total amount of loan that has been recovered and sanctioned from EMIs. Among the hidden charges that you can incur, include:
⦁ Transaction fees
⦁ Standing fees
⦁ Loan fees
⦁ Insurance costs
⦁ Down Payment
Down payment or upfront payment is the amount of money you should make when buying a real estate property, car, or any other valuable asset. Down payments may come from your savings account or credit.
Mostly, down payment serves as a guarantee to lenders and may help to establish a trust relationship. In addition, when you make down payments, there is a chance that your interest rates will be low.
⦁ Repayment Period
Repayment refers to an act of reimbursing the money borrowed from lenders. The repayment process can start through the periodic payments that include interest and principal.
Loans can also be cleared in lump sums anytime, but some repayment agreements may impose an additional fee for early reimbursement.
⦁ Contract
Loans are ubiquitous, and their repayment agreements are no exception. Loan agreements refer to contracts that exist between borrowers and lenders. They come in different forms, ranging from an easy promissory agreement between family members or friends to detailed notes, such as auto loans.
These loan contracts encompass collateral value, terms of interest rates, covenants, repayment duration, and guarantees. They may also have default terms, which are clearly outlined to avoid attracting court action. If the situation of default happens, the terms of collecting an unsettled debt should specify the penalties. This may also apply to parties, which are using simple promissory notes.
The Bottom Line
With many lenders in the market, including the private sectors, there are countless options of loans. Before you apply for any loan, it’s crucial to evaluate some of the above factors to increase the qualifying chance.
However, if it crosses your mind that any of these factors might negatively affect your approval odds, take the measurements of improving them before giving it another bet.