How do loans work? 10 important things you need to know

How do loans work? In financial terms, a loan is a sum of money that a financial institution grants to a person with the condition of consolidating the payment within a specified period. For this, the lender sets conditions, including an interest rate that can vary according to the type of loan, the credit score of the beneficiary and the time in which the loan will be paid off. Here are 10 things you need to know about how loans work!

Types of loans, interests and requirements:

Before applying for a loan, you should know the types of credit that you may have access to according to your financial situation or to the what the loan is for. You should know the five main types of loans. These are the most common types that people take out.

How do loans work? Secured loans

A secured loan requires the beneficiary to guarantee an asset. This is because financial institutions need to protect themselves from losses. One way to do it is by ensuring that the amount loaned can be repaid in one way or another. By doing this, you will have a better chance of receiving a credit, especially if your credit score is not optimal.

Unsecured Loans

If you have a good financial history, you should have no trouble qualifying for a short-term loan. Unsecured loans do not require the beneficiary to provide any type of collateral either. In these cases, financial institutions approve loans based on data such as credit history.

Educational loans

An educational loan is used to cover higher education expenses, such as tuition, books or school supplies. There are many different options for obtaining an educational loan but, in general, beneficiaries are given a period of six months after graduating to start paying the agreed monthly payments.

Personal loans

A personal loan can be used for anything the borrower wants, from paying for a home renovation to buying a car. One way to access this type of loan is by going to a bank or analyzing the options offered by lenders online, to identify the interest rate and fees that must be covered.

Vehicle loans

Vehicle loans allow borrowers to finance a new or used car through fixed payments without having to cover the entire amount at once. It is important to request as much information as possible to know the interest rate, the payment methods and the terms in which the loan must be paid in full.

Identify the amount to pay

For many people, the need to apply for loan comes unexpectedly, so they have to abide by the conditions of the first lender who qualifies them for the loan. However it’s ideal is to investigate the conditions of the loan and to know the total amount that you will be paying. This amount can vary, depending on factors such as: the credit history of the borrower, the initial payment that is granted, if it is a guaranteed loan, among other things.

Make sure you are able to make the payments

Not all people are in a suitable financial situation to apply for a loan. Although there are options for receiving loans, such as payday loans, experts do not recommend acquiring debt of this type. This is because the borrower could lose an asset or part of their assets if they are unable to make the payments, which would cause serious, and sometimes irreversible, damage to their credit score.

Credit score

The more stable your financial history, the more options you will for getting a loan with good interest rates and payment terms. It is essential for financial institutions to ensure the loan will be repaid. Most lenders give preference to users with an excellent credit score (above 6900, but there are also others who make loans to people with a score of 610, which is considered the minimum to apply for a loan.

Employment and housing history

Regardless of a person’s credit history, one point that could make the difference in qualifying for a loan is having an impeccable work history and proof of housing. If the lender finds that the borrower does not have a job or stable income, or that he has problems paying a rent or mortgage on time, then they will not want to grant a loan.

Cash payment

If you want to apply for a credit or loan, the ideal is to show that you are sufficiently solvent. In these cases, a cash down payment will go a long way toward obtaining personal loans or car financing. A down payment is the norm in most financial transactions. Depending on the type of loan, lenders can require a down payment of up to 50% of the requested amount.

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