Before you even think about applying for financial assistance, you need to know what is a loan and how you can benefit from it. There are many uses for this financial aid but you also have to approach it with great care. In all sense and purposes, a loan is borrowed money that you can use for whatever purpose you need.
But in order for you to maximize the benefits of a loan, you may want to understand the loan rates first. This is an important factor in determining your monthly payments.
What are loan rates?
If you have to use a loan to get you out of a financial crisis, it is vital for you to understand the various details that will affect your payments. The most prominent of them all is the loan rate.
Loan rates are simply the interest rate that you have to pay on top of the money that you will borrow. This is the fee that you have to pay, as the borrower, for the advanced money that you will get. It is how lenders will profit from the loan transaction. It pays for the risk that the lender is taking for lending you the money.
The loan rate usually varies depending on different factors. For instance credit card debt (which is one form of loan) is high while a secured loan is among the lowest. Here is a list that will help you understand why it varies.
Credit risk. The major purpose of the interest rate is the credit risk. There is every chance that the loan will not be repaid. This is the reason why for every loan payment plan, you usually pay the interest first before the principal amount. The higher the chance of the borrower defaulting on payments, the higher the interest rate. We’ve mentioned the difference between credit cards and secured loans. With a secured loan, you have a collateral serving as the guarantee of the lender. In case you default on payments, the lender can seize the asset you identified as the loan collateral. That will compensate for the loan so the lender does not have to give you a high rate. There is no security in credit card debts so the interest is higher in comparison.
Loan duration. This refers to the time frame between the release of the loan and the time you will completely pay it off. The longer the payment term, the longer the lender has to part with their money. That will prompt them to impose higher interest rates on you. If you can pay off the loan during a shorter term, then you can expect a lower interest rate.
Taxes on the interest. The interest is a form of income and you can expect that the lender will be taxed for it. There are type of loans that have tax advantages and they will not feel the need to impose you with higher rates. For instance, state and federal loans are usually exempt from taxes so they have lower interest rates as compared to private lenders.
These are the major factors that affect loan rates. You may want to consider these carefully before you finalize the loan that you will get. Of course, you want to stick to the lowest interest that you can get so that you don’t have to pay a high monthly amount.
How to choose the right loan rate
We have mentioned previously that your loan payments will be influenced greatly by the loan rates. Here are some of the things that you need to do so you can make a smart choice in your loan.
Analyze your payment capabilities. With any loan application, you always have to start by analyzing your finances – most especially your ability to pay back the loan. It will help you decide how much you can afford to pay every month.
Identify the type of loan that you will get. By knowing your finances, you can determine the length of the payment schedule, loan amount and loan rates that you have to target. For instance, if you need a big amount but you cannot afford to pay much every month, you will fare better by applying for a secured loan.
Compare lending institutions. When you know the type of loan that you will get, it is time to make a selection on where you will get it. You have a couple of places to look for them. You can use online comparison sites like Bankrate.com or GoBankingRates.com. These sites will give the details of every loan and what each lender can offer in terms of interest and other details. You can also use review sites like TopTenReviews.com to find the best lenders in the market. Keep in mind that lenders differ so to make your research as extensive as you can.
Compare the loan with the same type. Make sure that you compare the same loan type across various lenders. Beyond the interest rate, you have to check the monthly payment amount, the terms of the loan (e.g. prepayment penalties, late payment charges, etc.) and the closing costs.
Here is a video from eHow that discusses how you can find a low interest loan.