To say that the topic of loans is a contentious one is a bit of an understatement. There are few subjects that are touchier than finances, after all, and I don’t think that most of us want to bring up our debts in casual conversations. Despite that, though, I think it’s really important that we educate ourselves on the different types of loans that are out there. While debt is an uncomfortable thing to discuss, that doesn’t mean that we shouldn’t.
That leads us to our topic of discussion today – how can we navigate the world of loans effectively and maximize our own gains from the process? What’s even involved with all of that? These are just some of the questions that I’m hoping to answer, of course, so do be sure to stick around.
There’s a lot to cover, as I’m sure you’ve already guessed. For one thing, we have to remember that lenders are in this business to generate at least some sort of profit, hence the need for something like interest rates. From the borrower perspective, it’s certainly irritating to deal with, but with that additional knowledge, it’s at least a pill that we can swallow.
What else is there really to know, then? Honestly, a lot of it will come down to what sort of knowledge that you have and what lender you decide to work with. If you go in with a game plan and know exactly what you’re looking for, you’ll have an easier time of it.
What is a Loan, anyway?
The first thing to know here is that loans can also be referred to as credit agreements. Even credit cards fall under this umbrella, although we often consider that to be in a separate category when thinking about it in a casual manner. However, seeing as they are a line of credit, they do count as a loan.
Beyond that, though, what is there to know? I’m sure most of us are looking for more than a “loans for dummies” explanation, right? There are a few components to get familiar with. The first there is the “principal” amount, which is the original amount that you borrow from your lender.
From there, you will end up paying more of that due to interest rates, which I mentioned briefly above. You can read a bit more about them on this website, if you are curious about how it works. Interest rates are a bit tricky in that they often fluctuate from borrower to borrower based on many factors (including external ones such as the current state of the global economy).
It might seem a bit strange to go in for a deep dive on this topic in particular but given how critical it is for understanding the rest that you need to know about loans, I felt it was appropriate. There are two different types that you will want to be familiar with: simple and compound.
Simple is pretty much how it sounds – it’s a flat rate that’s decided upon in the beginning of your contract. So, if you’re meant to pay five percent interest on a principal of five thousand dollars, it will stay that way throughout the entire duration of the credit agreement. Admittedly, it’s something that we see for savings accounts that we own more often than loans these days.
Compound is a bit more complicated, of course, and tends to cost the borrower more money in the end due to its very nature. Essentially, beyond just paying the interest on that principal amount, you are also paying on the additional fees that you have accrued over time. That means that the amount that you’re paying back is growing exponentially compared to the other option – to no one’s surprise, though, this is what most financial institutions prefer to use.
Another note about this is that the rates that you are offered can differ greatly depending on your credit score. Now, if you’re not familiar with yours already, I would highly suggest that you check it out real quick before you apply for a loan. This will help you get an idea of what to expect, and there are tons of free programs that you can use to take a peek.
If yours is on the lower end of things, then you can probably expect to see a higher interest rate offered than someone who’s got a higher score. This is because of the risk that lenders are taking on by lending to you, so just keep that in mind. It’s okay to wait awhile before you delve into private loans if you still need to build up your score.
Types of Loans
With some of that background information out of the way now, we can look at what sorts of loans are out there. As you may have already guessed, there are a ton of varieties – and that’s why it’s so important to figure out what specifically you are looking for before you discuss it with your financial institution of choice. It’s easy to get led astray otherwise.
The name really does say it all here – these are credit agreements designed for businesses to utilize (usually small ones, but not always). They work a bit differently than the other ones that we discuss in that they cannot be given to a single individual, and thus approval is not necessarily based on credit scores.
Of course, that doesn’t mean it’s easier, just different. Since it’s not really the main focus today, I’ll move on, but its worth noting that this is an option if you have a small business that needs some additional funds to get off the ground properly.
Another case of “it’s what’s labelled on the tin,” we’ve got auto loans. These are for anyone looking to buy a vehicle. Basically, a lender agrees to pay off every part of the purchase other than the initial down payment, and the borrower will make repayments on that loan once a month. Most adults are quite familiar with them really, so I’m sure I’m not telling you anything you don’t know.
Mortgages are quite similar to auto loans in that they involve a lender covering all costs of a large purchase minus that down payment. This time, though, apply that concept to properties (most often homes, although there are other possibilities). Again, though, a lot of people are already aware of what these are, so I won’t linger.
This is where things get interesting again. Even for those of us who know what these are on a vague sort of level, there’s still a lot more to learn. What can we use them for, and why are they considered different from the other ones that we’ve discussed so far? Most of it, incidentally, comes down to what you can use the funds that you borrow for.
Something that you might have noticed about all of the other ones is that they’re each designed for a vey specific purpose. When you open an auto loan or a mortgage, you can’t just go and use that money for anything. Instead, you have to use it for what you agree upon in your contract. It works a bit differently for private loans.
Now, I want to preface this with the fact that if you opt for one of these, you will probably notice some high interest rates – it’s part of the nature of these loans, seeing as they are inherently a bit riskier for lenders. That being said, though, it’s often worth that. You see, with private loans, you can spend the money that you borrow on almost anything (so long as it’s not, you know, illegal).
What do people use it for, then? Well, there’s a few different answers, of course, considering the possibilities are nigh endless. For most, they use it to accomplish some of their practical goals that they already wanted to complete but needed an extra boost to get there. Home renovations are a great example of this.
Whether you’re renovating to increase the market value of a property or for your own personal enrichment, private loans are certainly one way to get it done. That’s not the only thing, though – plenty of folks use them for slightly more fanciful things as well.
That might be a wedding ceremony, or even a vacation in some cases. The only caution that I have here is that you should make sure that you are able to pay back a loan like this before you commit to it fully. Consider your budget currently, and whether or not you can comfortably afford to add another expense to your list. If the answer is no, you may want to hold off.
However, if you are confident in your repayment plan and know that you can make the monthly payments with success, then I say go for it! If you’ve decided to move forward, there are a few tips and tricks that you can use to find the best loan to suit your needs. While this might sound obvious, it’s important not to forget that you’re the customer here, and financial institutions should be doing their best to win your business.
So, browse your options before you make any concrete decisions. Compare the interest rates available and think about the other factors at play as well such as customer service and availability. If you do that, you should hopefully be able to find a lender who offers credit agreements that work for you!