Consumers seek loans for different reasons. Their first need is usually for a student loan in college. Others can include personal, home purchase, home refinance, home equity and debt consolidation loans.
Loans have three components – interest rate, security and term. The interest rate is the lender’s charge for your use of the money and is usually a small percentage of the amount loaned. Fixed-rate loans lock in a certain percentage rate for the life of the loan. Variable or adjustable rates can change over time and are usually based on the prime interest rate.
Loans are either secured or unsecured. Secured loans require assets, or collateral, to guarantee the loan. With a secured loan, the lender is guaranteed repayment because it has the right to seize the collateral. Unsecured loans do not require collateral, have higher rates, and may require a co-signer to vouch for repayment.
A loan’s term is the length of time the borrower has to repay it. Most personal loans have terms from one to five years, while the majority of student loans have 10-year repayment periods. The longer the term, the higher the interest rate, although loans can always be paid off before the term is up.
As you consider lending institutions, ask each for a selection of rates and research the credit scores the bank or credit union will require for the best rates. Do not submit a formal application until you’ve selected the lender, because each time your credit score is checked as part of a loan application, the inquiry can result in a lower FICO score. The lower your score, the higher the rate you’ll be offered.
Of course, you should know your credit score in advance and correct any errors that may affect it. You can order a free credit report at annualcreditreport.com. If you find errors, correct them and re-check your score; a higher score can get you the loan you need.
Steps for Success
o Personal loans can be for almost any purpose. These are best if you want to borrow only a small amount and can repay it in a few years. Interest rates on personal loans can be high, usually between 10 and 12 percent
o When you use a credit card, you are taking out a loan. The amount of credit extended to you depends on your creditworthiness, which is determined largely by your credit score, and lines of credit can range between $300 and $10,000.
o When considering a loan, banks and credit unions should be your first choices. If you are a reliable, long-term customer, your bank may consider a signature loan, meaning that you need no collateral.
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