It’s important to learn a few things about loans and the lending industry before taking out your first loan. Many people think that two loans that provide the same amount of money are completely identical. But this isn’t the case at all.
A lender might lead you to believe that if you can afford a monthly payment then you can afford a loan. In reality, this is only half of the story. You have to look at the big picture to understand if a loan is good for your situation. You may need to do some reading or get some outside advice.
AAACreditGuide.com explains personal loans very thoroughly. Here is a quick explanation of the key points below.
Getting a Loan Basics
Getting a loan isn’t all about getting a specific amount of money. It’s about borrowing money for a low price. Every time you borrow money, you are charged for the privilege. If a lender didn’t charge you a little extra when they lent you money, what would be the point of lending the money? That is their business model.
This extra money you’re charged every month when you repay your principal balance is called interest. Interest payments don’t just create profits for your lender. They also make up for the times that borrowers like you miss payments or default on a loan entirely. When companies take in extra money through interest, they can stay afloat during the times when borrowers fail to make payments.
The amount of interest you are charged gives you an idea of how much risk a lender takes on when they give money to people in your financial situation. This isn’t the only extra money you’ll pay every month though. You’ll also pay fees, which are specific to the lender you choose.
APR and Other Fees
Fees and interest together determine a loan’s Annual Percentage Rate. When you see a loan or credit cards “APR”, this is what it means.
Interest is easy enough to understand, but fees can get kind of murky. A good lender won’t charge a lot of fees. Some lenders, however, have many fees hidden within their agreements. It’s important to understand all of the extra payments you risk when you take on a loan with a new company.
One of the most common extra fees is the penalty for paying off the loan early. This is a fee to be avoided because paying loans off early is the only way to save money on interest. In short, it’s a good thing for the borrower to do. If a company is charging you this early repayment fee, they are essentially locking you into a contract until they’ve extracted all the possible interest and fees from your account.
Look Around Before Deciding
Understanding these terms isn’t the only thing you need to know about to get a good loan. You’ve also got to know all of the places you could find a loan. Many people are aware that banks and retail institutions offer loans and credit. However, they aren’t aware of all the internet and mobile companies that offer money at discounted rates. So do your due diligence before you commit quickly.
Try to find all of the companies that offer money to people with your kind of credit history. Once you’ve learned the shape of the industry, you’ll be in a place to determine just what kind of loan quality you will qualify for.
Questions for Discussion: What other things do you need to be aware of before taking out a personal loan? Have you ever made a bad decision when getting a loan? How did it hurt you financially?
informative article. thanks for sharing 🙂