HOW LOANS WORK?
Before receiving a loan, both the borrower (the person taking the loan) and the lender (the bank or institution providing it) must agree to the loan terms. These terms cover the loan amount, the interest rate, and the repayment period. In some cases, the lender might ask the borrower to provide collateral, which is an asset (like property or a car) that the lender can claim if the loan isn’t repaid. Also check Singapore licensed money lender
Common examples of loans include mortgages, which are used to buy houses, and personal loans, which help cover various individual needs. Banks, companies, and even governments can take out loans. For lenders, the interest and fees they charge serve as revenue.
TYPES OF LOAN
2.1 SECURED AND UNSECURED LOANS
- Secured Loans: These loans require collateral, which acts as a guarantee for the lender. For example, a bank may hold the title deed to a property or the ownership papers of a car until the loan is fully repaid. These loans generally have lower interest rates, strict borrowing limits, and longer repayment periods, as the collateral reduces the risk for lenders.
- Unsecured Loans: These loans don’t require collateral. Instead, lenders evaluate the borrower’s financial stability, credit history, and income to decide if they can repay the loan. Examples of unsecured loans include credit card purchases, personal loans, and education loans.
2.2 OPEN END AND CLOSE ENDED QUESTIONS
- Open-End Loans: These loans allow borrowers to withdraw funds repeatedly up to a specified credit limit. Credit cards and lines of credit are good examples. With an open-end loan, borrowers can use the available funds whenever they need and only pay interest on the amount used. As borrowers make repayments, the amount they can borrow again increases.
- Closed-End Loans: In this type of loan, the borrower receives a fixed amount upfront and cannot borrow more until the loan is fully repaid. Each payment reduces the loan balance, but if more funds are needed, the borrower must apply for a new loan. Mortgages, auto loans, and student loans are common examples of closed-end loans.
THINGS TO CONSIDER BEFORE APPLYING A LOAN
3.1 CREDIT SCORE AND CREDIT HISTORY
Your past debt repayment history is reflected in your credit score.
A higher credit score makes it easier to get loan approval and better terms, like lower interest rates. Lenders view a good credit score as a sign that you’re likely to make payments on time, so maintaining a solid credit history can improve your loan options.
3.2 INCOME
Lenders will often ask for pay stubs, tax returns, or other income documentation to confirm that you can repay the loan. Employees might provide salary statements or letters from their employers, while self-employed applicants usually submit tax returns and, if needed, records of business income.
3.3 MONTHLY FINANCIAL OBLIGATIONS
Lenders also look at your monthly expenses to determine if you have enough money left over after paying your bills to afford loan payments. If your monthly expenses are too high compared to your income, lenders may be less willing to approve a loan.
