Category Archives : Loans

Types of personal loans

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Financial stability today is not an indication or forecast on how things will always be. For one reason or the other, you might find yourself in need of some cash injection to meet a need. When this happens, one of the best options you have is to go for a personal loan. As the name implies, this is the kind of loans extended by financial institutions to individuals to help them meet their own personal needs. Personal loans can basically be extended by banks, loan companies from both online as well as from brick and mortar offices, credit unions and can be grouped into 2 major categories. These are:

  1. Secured personal loans

  2. Unsecured personal loans

Secured personal loans

As the name suggests, these are the kinds of loans that require collateral or some form of asset security. Financial institutions require that you pledge an asset before you can be approved for this kind of loan. Most of the time, you can pledge as security your home, car, or any other kinds of financial assets that a financial institution might deem necessary. The idea of collateral is to enable financial institutions lending money recoup their money should you fail to repay the loan extended to you. It serves to cushion the lending entity against loss of the money they extended to an applicant.

Unsecured personal loans

In most cases, unsecured personal loans are extended on the basis of a person’s credit worthiness as opposed to their assets. In this regard, they do not require that a person pledges any of their assets as security. In any case, should a person fail to repay unsecured personal loans, the lender always takes legal actions against the borrower to recoup their money. The drawback is that as a result of the lack of collateral, lenders tend to charge a high interest rate as a result of the great risks involved with this loan instrument.

While there are many different types of personal loans you can apply in the market, it’s highly recommended that you choose wisely the kind to apply for based on their terms and conditions. For instance, you need to be conversant with the fact that secured personal loans have a negative impact on your personal assets should you fail to repay the loan as agreed. The Bank or financial lender in question might seize your property and sell it to recap their money. You also need to read the terms and conditions of the loans, understand all about the interest payments as well as what happens when you default payments for a couple of months.

Unsecured personal loans on the other hand do not mean that you need to sit back and relax because your personal assets are not on the line. If you value your credit score, then it’s essential that you make timely monthly payments as defaults could mean a dent to your credit rating. The probability of legal action is also something you need to consider as it would malign your name.

Short term loans vs. Long term loans: a look at the distinction

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The demand for loans is at crescendo. Over the years, the demand for loans has been gradually increasing as people find ways in which they can get credit to advance their individual or collective interests. You only need to look around to appreciate the number of institutions or lenders all promising to advance you credit at affordable rates in the UK.

However, if it’s your first time applying for a loan, you might find yourself in a dilemma determining the kind of loan you should go for. The truth of the matter is that there are basically two broad types of loans – short term loans and long term loans. To give you a sneak peek of these two kinds of loans, we are going to discuss them at length so that you make an informed decision when applying for either of them.

Short term loans

As the name indicates, these are the kind of loans that last anywhere between 2 weeks to 12 months maximum. Short term loans are usually advanced to people who need a small amount of money quickly within a short period of time. They have less stringent requirements and are therefore pretty much approved within the shortest time possible. In fact, you can now get access to short term loans online within a couple of hours provided that you have provided all the required details and documents.

Short term loans are not ideal for people who require a huge sum of money as most of the time; a person can only borrow from a minimum of £50 up to a maximum of £1500. Ordinarily, people apply for short term loans to sort out emergency issues and in most cases, one does not need to have a stellar credit score or pledge security to the lender.

Long term loans

Unlike short term loans, these kinds of loans are the one designed for an extended period of time lasting from anywhere between 1 year to 30 years. It’s ideal for individuals who are seeking for loans for investment purposes, to buy a house, a car or any other thing that require a huge amount of money.

While short term loans generally do not require collateral, the same cannot be said about long term loans as lenders require some sort of collateral to cushion themselves should the applicant be unable to pay the loan as agreed. The application process is also strenuous which basically means that one has to wait for a long period before they can be approved. Banks typically offer this kind of loan and having a good credit history is a precursor before a person can be approved for this kind of loan. If you don’t have a good credit history, then having a guarantor is of essence.

In conclusion, depending on your needs you can choose to apply for any of the above two kinds of loans. If you simply need cash for emergency purposes, then going for a short term loan is the idea thing to do. On the other hand, if you want to buy property, a car or machinery, going for a long term loan is the logical thing to do. You however need to carefully read the fine print and terms of loans to avert a situation where you have to deal with hidden charges.

Features of long term loans

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If you are a business entity, you have access to either long term or short term loan. However, we both know that short term loans are not viable in a business setting especially if you are considering buying stock, machinery or even buying a business car. In most instances, businesses prefer to go for long term loans as opposed to short term debts. We are going to take a look at some of the characteristics or features of long term loans or long term debt. What is it about long term loans that you need to know about? What are some of its features?

Collateral

A long term loan cannot be advanced to a business in the absence of collateral. A business would need to pledge an asset of sorts to act as security. Conversely, if a business is seeking for a long term loan to buy a piece of land, then the lender would always use the land to be bought as security. The same applies for a mortgage on a business building or a loan on business machinery. Should the business be unable to reimburse the loan advanced to them, the lender can always sell the collateral to recoup money they had advanced to the business entity.

Term of the loan

Generally, unlike short term loans, long term loans last for a period of anywhere between one year to a maximum of 30 years. The term of the loan is determined by the value of the respective asset or item that a business is seeking financing for. For instance, it would be crazy for a car loan to attract a 20 year financing especially considering that a car is a depreciating asset and its value would have diminished considerably in 20 years. Conversely, a land loan would attract a 20 year financing or repayment period because of the fact that land is an appreciating asset and hence its value is bound to increase over the years.

Interest rate

As compared to short term loans, long terms generally attract a low interest rate and the rate ordinarily don’t fluctuate over the term of the loan and if they do fluctuate, it is never for a higher interest than what was set at the time of applying for the loan. The reason for the relatively low interest rates is because of the security of the asset pledged. Another interesting or good thing about the long term loan is the fact that a person pays considerably less interest as the principal amount reduces over a period of time.

Risk

A business seeking for long term debt shouldn’t take it as given that they would be approved for a long term loan. Generally, lenders are wary of businesses embroiled in a lot long term debt. Lenders generally extend long term loans to businesses or companies with a low debt to equity ratio. As such, if a business has a high debt to equity ratio, then they might find themselves in a quandary in so far as advancement of long term debt is concerned.

A look at loan basics

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The term loan is broad and encompasses different types of loans. However, while we have access to different types of loans, the truth of the matter is that all loans ascribe to the same building blocks. We are going to explore these building blocks with the sole aim of ensuring that you understand them and that you make the right and informed decision before applying for one.

  • Eligibility

The term eligibility basically refers to the set of minimum requirements that you must meet before you can be deemed qualified for application of a given loan. Generally, eligibility requirements differ from one loan to the other. For instance, the eligibility requirements for a logbook loan are quite different from those of a payday loan. Understanding eligibility is therefore of essence before applying for any given type of loan.

  • Interest rates

Interest rates refer to the amount of money lenders charge on loans advanced. Different loans attract different interest rates based on the type of loan, amount as well as term of the loan. Before applying for a loan, understand what the interest rate is as well as how it will affect the overall amount of money you will repay in the long run.

  • Original fees

A loans original fee is as simple and straightforward as the processing fee of the loan. It’s simply the amount of money you pay to facilitate processing of the loan.

  • Repayment terms

Repayment terms simply refer to mode of repayment. Different loans have different repayment terms. There are loans that require repayment within a year while there are loans that require repayment for over a year. Repayment terms are instrumental as they make you have an idea of when you will begin making repayments, the duration of the loan and the amount you will be paying monthly.

  • Loan limits

This simply refers to the maximum amount of money you can apply for any given kind of loan. For instance, the maximum amount of money you can apply for a day loan greatly differs with the kind you can apply for a logbook loan.

  • Borrower incentive programs

As the name suggests, this is an incentive program that a number of lenders offer for say, early repayment of a loan. For instance, there are lenders who are willing to offer you a relatively lower interest rate if you set up direct debit for repayment of loans. An understanding of this is instrumental in helping you make an informed decision.

  • Promissory note

As the name suggests, this is basically a contract between your lender and you promising to pay the loan extended to you at a determine date. For instance, if you are applying for federal loans or student loans, you are required to sign a promissory note which binds you and basically specify what your responsibilities are under the terms of the loan.

To sum it up, learning the loan basics and the terms that are commonly used are essentially towards making the right call in so far as application of loans are concerned.

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