Understanding Loans

Understanding Loans

A loan is often described as a transfer of money from one party to another with the intention of repaying the money to the other party at some point in the future. Loan terms are negotiated between each of the parties prior to any funds are actually advanced. A loan can be secured by collateral like a home or it can be non-secured like a credit card. Some loans can also be applied for online, though the funds need to be transferred within a few days. The majority of loans are secured by some type of asset.

There are two main types of homeowner loans: first, a term loan which are for a fixed period of time; and second, a balloon loan which is used to fund large expenses during the middle of the term. With a term loan, the principal amount of the loan is paid back over a defined period of time. When the term is over, and the principal amount is due, the lender has the option of renewing the loan or taking the amount due plus the balloon amount paid out in full to another lender. However, the amount paid out in balloon is usually less than the total principal amount due if the loan was not for a fixed term.

A balloon loan agreement is entered into when a consumer is unable to pay the debt back in full within the agreed term length. This could be due to a rise in monthly payment, or to poor financial management of the principal amount. In these circumstances, the lender will renew the loan for a longer period of time at a slightly increased rate of interest, so that the lender will have the ability to recoup their investment sooner, rather than later. A repayment holiday, where the borrower is able to reduce the repayments month by month, is a popular method of reducing monthly payments.

An important thing to remember when taking out a loan, whether it is for purchasing property, buying an automobile or any other purpose, is that the borrower must repay the loan on time. The lender will not consider any late payments or defaults on a loan application, meaning that the borrower must repay the full amount without fail. If the borrower does not repay the loan within the agreed term, the lender may take possession of the collateral used to secure the loan, which may include vehicles. If a borrower fails to make a payment, then the lender must obtain legal advice to determine the appropriate course of action.

When considering different types of loans, it makes sense to consider the various loan terms. For instance, the interest rate on a secured loan can be considerably higher than that on an unsecured loan. Similarly, the cost of borrowing will differ between secured and unsecured loans.

It makes sense to shop around and consider all aspects of a home or property before taking out one of these loans. For instance, it would be prudent to compare gold loan prices to ensure that one is getting the best deal. One can use specialist websites to gather together quotes and compare them to ensure that they obtain the best loan for their circumstances.