Loans are available for large purchases that cannot be paid in full up-front in cash. Common loans are for purchases like a new car, a home or for going to school.
These large purchases often require the assistance of a large financial institution to provide the payment in full that you can then slowly pay back over time. However, loans also come with interest rates that you must be aware of and prepared to add to your total costs. Learning how loans work can help you to be better prepared for these large purchases in your life.
Knowing how loans work also means understanding who provides a loan and how you can apply to receive one. Understanding this process can make it easier if and when you need to apply for a loan. There are many types of loans that you might need over time, so find out how they can help you through these large life purchases and what getting a loan might mean for your finances and your purchases.
Who offers loans?
Loans are generally offered by banks or other money-lending institutions of varying size. Loans can be for small purchases or for large purchases, although larger purchase loans are more common. If you already have a bank account at a certain institution, you can start there to ask about your options and the potential interest rates you might get from your own bank.
Note that loans typically have specific time periods for repayment, so you can plan ahead and calculate your own costs for months and years to come. Keep in mind the interest rate offered and always look for options to reduce your interest rates by reaching out to your lender for refinancing as appropriate.
Types of Loans
Loans are available for any of a wide variety of purchases, although there are several very common purchases for which a loan might be appropriate. Review the following popular options to see if any are the type that might apply to your current or future needs.
A personal loan can be used flexibly, which means you might need it for anything from a small house renovation to emergency medical payments to anything else of a personal nature. These can be difficult to qualify for but can be very useful. Personal loans are especially good for those who are able to repay the full amount within the allotted time to avoid any further financing concerns.
Personal loans do not require you to offer any form of collateral, which means that the lender takes on a larger risk in letting you borrow money. However, a lender will carefully inspect your credit history, credit score, financial health and other factors to determine your capacity to and the likelihood of you repaying the full amount on time.
Business loans are quite common for those considering starting a new enterprise and need capital to get started. The two most common types of business loans are called Term Loans and Small Business Administration (SBA) Loans.
Small business owners and entrepreneurs could qualify for a variety of business loans that vary from small to large sums that can be used for various business expenses. For example, a business loan could be used for purchasing equipment, for a building rental or purchase, and even for providing the capital you need for customer purchases before they actually pay.
Auto loans are available when you want to purchase a new or used vehicle but you do not have the cash to pay in full up front. In determining your auto loan terms and conditions, the total amount to borrow, the interest rate offered and the length of the loan term will all be factors to consider. Remember that paying off a loan over a longer period of time incurs more interest as well. If you are able to do so, you should try to pay off your loans as quickly as possible.
Student loans have grown by necessity as the cost of education continues to increase. Student loans are available both federally and privately, so you can choose the right type of loan based on your needs and finances.
A consideration for student loans is the interest rate and the time when you need to begin repaying your loan amount. Some student loans require immediate payments upon graduation, while others offer a grace period of several months so you can begin working first. Be sure you know the terms of your loan before you accept any contracts.
Payday loans are available as a quick way to borrow money if you have an absolute emergency that cannot wait. These types of loans are very risky and the terms will be much more difficult to handle in comparison to other loan types. Typically, you will need to offer collateral in order to get this loan, so you need to know that you will repay it.
There are many lending institutions offering these types of loans, but you need to choose carefully when accepting such a loan. These loans are typically for smaller amounts, but they come with higher interest rates so they are a risky financial decision that should only be made when necessary.
Getting a Loan
Getting a loan can be as easy as simply filling out an application at your current bank or at a financial institution where you have had previous dealings. However, you should first review your own personal financial health to see if you are currently qualified and capable of getting the right loan for you. Applying for a loan means divulging all of your financial details, from your total household income to any outstanding debt you might have now.
Getting a loan can be a great way to progress both personally and professionally, as long as you understand the implications and the requirements of getting a loan. You should ensure you are prepared to repay any loan you take and make sure you have a financial plan for your future to include these payments and the interest they incur.