Loans are financial assistance/money provided to individuals or institutions with the understanding that it would be returned at a later period, with or without interest. Other assets, such as land, machinery, and buildings, can also be loaned.
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Most loan arrangements include the following:
The amount of money loaned or borrowed is referred to as the principal.
ii. Interest Rate
A fee levied or paid for the usage of borrowed funds. An interest rate is often stated as a percentage of the principal each year. It is computed
By increasing the interest rate by the principal For example, if a lender (such as a bank) charges a customer 20% interest per year (per annum) on a loan of N1,000,000.00, the interest payable is N1,000,000 X 20/100 X 1year = N200,000 (per annum)
Iii. Repayment Date
The date when the principal and interest must be repaid.
There are, however, financial entities that provide no-interest loans. However, they are entitled to a portion of the profits generated by the firm for which the loan was made.
Money is required to meet personal necessities and to realize business ideas. As a result, when such requirements and ideas occur, a person or organization might approach a financial institution for a loan. People take out loans to acquire homes, automobiles, and education, among other things.
Importantly, firms take out loans to expand.
The repayment = principal + interest. The interest rate can be calculated using the formula above. Interest rates are flexible, rates are dependable on the borrowing time. The longer the borrowed money stays with you, the more the interest rate.
Consider the following before taking out a loan:
An individual or organization should think about:
• The reason
• The necessary amount
• The capacity to pay both principal and interest over the course of the payback term
• Approaching a banking institution
• The collateral (guarantee)
• The terms and conditions
Read Also: 40 Top Loan Terminologies
Borrowers must meet the following criteria to be approved for loans:
• Have a bank account
• Be mentally fit
• You must be of legal age.
• Have trustworthiness
• Have a decent credit score
• Comply with Know Your Customer (KYC) regulations
• Be able to pay back the loan
How Does Your Credit History Impact Your Interest Rate?
A credit score is a number ranging from 300 to 850 that represents a consumer’s creditworthiness. The higher the score, the more appealing a borrower seems to potential lenders.
A credit score is determined by credit history, which includes the number of open accounts, total amounts of debt, repayment history, and other variables.
Lenders use credit ratings to assess the likelihood that a borrower will repay loans on time.
How Credit Scores Work
A credit score may have a big impact on your financial life. It is an important factor in a lender’s decision to extend credit to you.
People with credit ratings lower than 640, for example, are termed, subprime borrowers. Lending institutions frequently charge higher interest rates on subprime mortgages than on normal mortgages to compensate for bearing greater risk.
For borrowers with a poor credit score, they may also need a shorter payback period or a co-signer.
A credit score of 700 or higher, on the other hand, is typically regarded as good and may result in a borrower obtaining a reduced interest rate, resulting in them spending less money in interest over the life of the loan. Scores of 800 or higher are considered good.
While each creditor establishes its own credit score ranges, the average FICO score range is frequently used:
Your credit score, which is a statistical study of your creditworthiness, has a direct impact on how much or how little you may pay for any lines of credit you obtain.
Factors That Affects Your Credit Scores
- Payment history
- Total amount owed
- Length of credit history
- Types of credit
- New credit
Payment history accounts for 35% of a credit score and indicates whether or not a person pays their debts on schedule.
The total amount due accounts for 30% of the total amount owed and includes the credit utilization percentage, which is the proportion of credit accessible to a person that is presently being used.
Credit history length accounts for 15% of the score, with longer credit histories being deemed less hazardous because more data is available to evaluate payment history.
How Does a Loan Payment Work?
Loan Repayment is a term that refers to the process of repaying loans.
The borrower is said to be released of all responsibilities and the loan is deemed repaid when he or she meets all of the terms of the loan agreement and repays the principal, interest, and any charges on the loan.
All pledged collateral for secured loans would be released to the borrower. Naturally, a smooth and tranquil connection will entice the lender to work with that borrower again.
If a borrower is unable to satisfy his or her repayment obligations, he or she might request that the loan be restructured. The loan arrangement can continue to operate under the new conditions.
Types Of Loans
Consumer loans and credit are a type of finance that allows you to buy high-priced things that you can’t afford right now.
Most consumer loans and credit are obtained via banks, credit unions, and internet lenders, however, family and friends can also be lenders.
Loans and credit occur in a variety of forms, ranging from basic credit cards to more complicated financing such as mortgages, auto loans, and school loans.
Regardless of the kind, all loans – including the terms and circumstances of repayment – are subject to state and federal regulations designed to protect customers from unscrupulous tactics such as high-interest rates.
In addition, to minimize misinterpretation or potential legal action, loan length and default terms should be explicitly specified in a loan agreement.
In the event of default, the conditions of the outstanding debt collection should explicitly state the expenses associated. This also applies to promissory note parties.
If you need to borrow money for a necessary item or to make your life easier, it’s a good idea to learn about the many forms of credit and loans accessible to you, as well as the conditions you may anticipate.
There are primarily two types of loans.
- Secured Consumer Loans
- Unsecured Consumer Loans
Secured Consumer Loans
A secured loan is one in which the borrower commits assets as collateral (guarantee) for the loan (e.g., property, moveable assets, etc.).
The assets are always worth more than the loan amount and can be claimed by the lender if the borrower fails to repay the loan according to the terms and circumstances agreed upon.
Secured Loans include:
• Term Loan – A term loan is a loan given by banks and other financial institutions for a particular amount, payback terms, and an interest rate that is either fixed or variable.
• Mortgage Loan– A mortgage loan is a loan given by banks and other financial organizations for the acquisition of real estate (property), generally with a fixed interest rate and term. It is protected by the structure of the building. After complete repayment and fulfillment of additional requirements, the borrower receives ownership of the property. In the event of a default, the property will be seized (foreclosure).
Unsecured Consumer Loans
An unsecured loan is one for which the borrower does not put up any property as collateral (guarantee). Because lenders take on greater risk with this form of loan, the interest rates are generally higher than with secured loans.
Unsecured Loans include:
• Credit Card Loan – An electronic card, typically provided by banks and other financial organizations, that allows the bearer to spend an amount in excess of his account balance, but up to a predetermined maximum. At regular intervals, checks and reconciliations are performed to keep the account in balance and claim interest, charges, and principal in accordance with the terms and conditions.
• Personal Loan – A personal loan is a loan given to an individual for personal or home purposes. These loans are granted by banks and other financial organizations depending on the borrower’s credit history and capacity to repay the loan with personal income. It’s also known as a consumer loan.
Individuals and businesses alike benefit from loans as a source of financial assistance. They give an additional stream of revenue that may be used to fulfill personal requirements as well as expand a business.
Individuals and businesses, on the other hand, should research and comprehend the terms and conditions of the loan on offer in order to select loan offers that are most suited to their financial capabilities and requirements.
It’s crucial to remember that all loans must be returned in line with the offer’s terms and conditions.
To avoid financial troubles, avoid taking out loans from unauthorized persons and institutions (Loan Sharks).