subject: An Easy Guide To How Loans Work [print this page] An Easy Guide To How Loans Work An Easy Guide To How Loans Work
Loans are a specific type of debt instrument that involve the redistribution of financial assets over a period of time between a lender and a borrower. The borrower typically borrows a sum of money (referred to as the principal), from the lender, who sets terms for repayment. These terms account for the actual amount of money borrowed, as well as interest charges. In most cases, the money is to be paid back in regular installments in the same amount (typically on a monthly basis), until the time that the entire loan has been repaid. Loans can be acquired through banks and other financial institutions, as well as through various types of loan brokers.
There are two basic categories of loans: secured and unsecured. Secured loans require the borrower to put up some form of collateral in order to obtain the loan. For example, a mortgage is a very common type of secured loan. In this case, the house would be used as collateral and the lender issuing the mortgage would have the right to repossess and sell the home in order to recoup its money, should the borrower default and not make his or her payments. Unsecured loans are loans that do not require collateral in exchange for funds. These loans can be in the form of credit cards, personal lines of credit, corporate bonds, personal loans, or bank over drafts. The interest rates that come with unsecured loans may vary from month to month, depending on the lender, and can be quite high. Banks, financial institutions, and various other types of loan brokers can issue unsecured loans.
Loans can be a very valuable tool that can be used for a wide variety of purposes. Most people find themselves taking a loan out at some point in the lives for major purchases such as: a home, a car, a major appliance, or to attend college. Other common reasons to seek a loan include: for business, for debt consolidation, for personal reasons, for renovations, or for medical expenses.
In order to be approved for a loan you must complete a loan application and provide documentation as to your ability to repay the money you are seeking. Some lenders may require this documentation prior to an application being filed as a form of "pre-qualification". Being prepared with all of the proper documentation will make the loan process flow much faster and easier for everyone involved. You should make sure you have the following:
* W-2 forms for at least the past two years;
* Paycheck subs for the last two months;
* Tax forms showing income for the past two years, if you are self-employed;
* Profit and loss statements for the past year, if you are self-employed;
* Checking and/or savings account statements showing balances for the past three months;
* Income statements from other sources (such as pensions, rental properties, real estate, etc.);
* The names and information for all co-borrowers.
If you do not have a credit history, all is not lost. You can present other information that shows your ability to make monthly payments. These documents can include utility bills, cell phone bills, rent payment history, insurance payments, electronics payments, and any other evidence you can present that will prove you have been making monthly payments on time.
If your credit history is a bit poor, you may want to consider finding a co-signer to help you obtain your loan. You should always choose a person with a clean credit history, and a high credit score. When submitting your loan application, make sure you list all of this person's information as they will also be screened. Be advised, your co-signer will be the person held accountable to make payments if for some reason you default on the loan.
You should also note that in addition to the monthly payments and interest charges associated with your loans, some lenders may charge you application fees, account maintenance fees, or other miscellaneous fees. Be sure to check in advance with your lender before agreeing to any terms so that you are completely clear on the total cost of your loan.
