LOANS: Critical circumstances can occur anytime which loans can be beneficial in times of emergency as it can be a way out of insufficient funds and related issues.
Loan refers to a type of credit vehicle in which a certain amount of money is lent to a party in exchange for future repayment of the principal amount.
A loan is a form of debt incurred by an individual or an entity. The lender is usually a financial institution, government; corporation advances a sum of money to the borrower.
In return, the borrower agrees to a certain set of terms which includes interest, finance charges and other condition.
Collateral maybe required by the lender in most cases to secure the loan to ensure the borrower repays the loan and its condition. This loan takes the form of bonds and certificates of deposit (CDs).
How It Works
When an individual needs money, They apply for loan in a bank, government, corporation or other entity, specific details like Social Security Number (SSN), financial history, reason for the application of loan and other relevant information may be required from the individual (borrower) as the lender reviews the information as the persons debt to income (DTI) ratio is included in order to determine if the borrower can repay the loan.
The credit worthiness will determine the approval and denial of the loan application. If the application is approved, both parties are to sign a contract that states the details of the agreement.
The lender gives an order for incurring the loan after which the borrower must repay the loan including the interest as agreed.
The terms of the loan are agreed by each parties before any loan which may be money or property is been disbursed. In a situation whereby the lender requires collateral, the lenders showed outline that in the loan documents.
The loan document should entail every information that concerns issuing of the loan.
Loans are given out for some couple of reasons which includes business ventures or expanding an existing companies, major purchase, renovation etc.
Many banks loans out money as this is the primary source of revenue, retailers through the use of credit cards.
Interest rates do have a significant effect on loans and its ultimate cost to the recipient or borrower.
Higher interest rates loan do have a higher monthly payments as it’s a very long time to pay off compared to loans which their interest rates come with higher monthly payments.
Interest is the cost of borrowing money where the borrower is expected to pay a certain amount to the lender for the loan. The interest is expressed in a percentage which can be in a simple or compound interest.
Simple interest is based on the principal amount of a loan while compound interest is based on the principal amount and the interest accumulated over a period of time. Simple interest is paid or received over a certain period is a fixed percentage of the principal amount that was borrowed. Compound interest accrues as it is added to the accumulated interest of previous periods, so the borrower must pay interest on interest as well as principal.
For Instance,
★ If Ann collects a loan of $150,000 to pay her children’s school fees on a simple interest rate to be paid yearly is at 12% per annum for 3 years.
Thus, Ann is expected to pay $54,000 every year for 3 years.
★ If Venco Oil Company borrows $1.2 million to buy a piece of land at 13% per annum compound interest for 3 years…
Venco oil is expected to repay $290,000 every year.
Benefits Of Loan Facilities
There are various reasons people borrow loans. Borrowing loan is one of most ways business is financed, school fees etc, are financed. In a situation where you have insufficient funds, The solution is to borrow. Loans are gotten to meet up long or short term financial needs which can be from family, friends, bank etc. Loan can also be used as a means of engaging in savings
★ Cash flow: To start up a business or larger projects you need capital. It is not easy to get capital to invest which a loan is opted in order to help you handle such business because the higher the capital the more chances to success of the business.
Cash flow helps to start a solid foundation for your business and reserve cash for operating the business as the business will not be at risk of falling because of insufficient funds.
★ Interest Rates: lower interest rates tends to attract more customers so that low – class earners can afford to secure a loan. Collaterals are sometimes required as a form of security in case if the borrower defaults in payment. The bank/ lender will be in apposition to repossess the collateral offered.
★Flexibility: loans and its interest rates can be negotiated before it’s given out. Adjustments can be made and the borrower can make plans on how to repay the loan. Once an individual or organization borrows, they are in control of the whole amount as you can choose what to do with it.
★Growth: For one to be a successful entrepreneur you need to get extra money to boost your business. Without doubt, having access to a loan will allow you to make an additional move to develop your business more. Availability of finance places you in a position to budget well and plan on how you will achieve your goals, grow , guarantees and qualifies you for higher loan if in need.
Advantages Of Loans.
★Loans can help in a tight spot: loans can be an excellent way to get out of a tight spot if it guarantees your financial better off after the loan. Loan is like a lender giving out an amount of money which you are expected to pay back in smaller installment over the agreed months or years.
★There are different loan duration: As this option may not be suitable for you, another will be suitable for you and its current situation.
There are short term and long term loans. Short terms loans enables you out of the situation or current circumstances while long term loans are usually obtained by companies as they go for larger amount which is in exchange for higher interest rates.
★There are different kinds of loan: Based on the present predicament or current circumstances you will out there are plenty option in order to acquire a loan. Whereas there are kinds of loans you want to take out.
Secured loans are taken out against an asset while unsecured loans are not, rather they usually require better credit.
★Improve a bad credit score: A bad credit score can be improved by making regular repayments on loans. Once your loan is approved make sure you repay based on the agreed terms in order to have a good credit score which opens all kinds of doors so as the goal worth chasing.
★Consolidate debt: A loan can be a way out of disparate debts. Many debts you might accrue will have differing interest rates which you can combine them all into a simple source. If you then have to make a repayment to one source. You have only one set of statistics and potential penalties to worry about while repaying.
Disadvantages Of Loans
★ A lot of Interest to be Paid: Due to what’s involved in acquiring a loan , you have more than the initial amount you borrowed as this is how the lender makes profit and still stay in business.
However, loans should be taken out only when really in need of money.
★ Loans often have fees as you are expected to make regular repayments because of your credit score. Loans do have late fees, penalties and other potential hidden charges associated with it.
Therefore, ensure you go through the terms and conditions thoroughly before signing or further actions by the lender.
★ You might not get what you want: you may not be approved for the loan that you want.
In some cases, you may need a certain amount of money which is up to lender to approve it or not which the individual may live up to the criteria needed or involved but won’t be approved. This depends on the judgment of the lender.
★ Bad credit means less likelihood of a loan: Credit rating is tied inextricably into if the lender will consider you for the loan or not. If an individual has a bad credit rating the lender tends to reject their application as they are doubts you will be to repay timely.
Also, due to bad credit score the individual has, it will be a very huge factor in the lenders decision making.
Borrowing loan will build your confidence in securing a loan. Loans are beneficial in times of emergency. It is provided to people in critical circumstances which may occur at any time.
However, Loans are being issued out for some couples of reasons which are paid at an agreed months or years to the lenders as well as d accrued interest rate.
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