Before borrowing money it is advisable to know what the terms of payment are going to be. It is therefore important to fully understand how loans work so that you are better placed to make better decisions about debt, to be more specific, how to avoid debt.
So, before taking that loan, here’s what you need to know.
#1 You need to understand the cost of money
Loans usually come with a number of costs ranging from interest, transaction fees to insurance. So, it is important to understand what it actually costs to get money. This knowledge is meant to help you make better decisions in terms of what type of loan to take, who to take it from, how much to borrow and how long to spread out the repayments. The goal is to minimize the costs.
#2 You need to understand the repayments
A loan is referred to as so because it is money you are going to repay. Generally, loans are paid back over an agreed period of time. The repayments are normally paid on a monthly basis are split into two, repayments for the loan itself and repayments for the interest accrued. A loan repayment spread out over a long period of time attracts smaller monthly repayment amounts but a higher interest whereas a loan repayment spread out over a short period of time attracts higher monthly repayments but a lower interest.
#3 The process of qualifying for a loan
Loans are not just given, you must qualify for them. Often, a lender will only give you a loan if they are confident that you will be able to finance the repayment. It is at this point that your credit score becomes important. A good score means you are more likely to get a loan whereas a bad score makes things much difficult for you. Your income also matters because it determines whether you will have enough money to make the monthly payments. In the event you have a bad score but you have something valuable to put as collateral then you may be able to access the loan. There is also an option for your loan getting co-signed by someone with a good credit score which means they assure the lender that they will repay the loan in the event you can’t repay it.
We trust that you are now better informed. Do share with us your thoughts on this article.