Decoding Loans – Grasping the Ins and Outs of Borrowing

Whatever the nature of your firm – whether this relates to expansion strategies that can boost it, day-to-day running costs, unhindered supply chains, or cashflow withdrawals and deposits – borrowing money is often the way to reach your business goals. However, before you raise your hand and sign on the dotted line to loan agreements online, there are key steps you should take.

Whether it’s interest rates, APR, collateral loans, credit reports, debt paydown, pre-qualification or preapproval procedures, you’ll be to make smart choices by following our guide.

Prequalification

By prequalifying for a loan or credit card, you can get a quick snapshot of what level of debt you might be able to manage. All it requires for a prospective lender to give you a number in this ballpark is some basic information.

This typically involves a ‘soft’ credit inquiry (so your credit scores won’t be impacted) followed by income and employment verification – along with some sort of asset verify that looks to confirm you have savings or an investment account.

Getting pre-qualified for a mortgage, for example, in which you go to a lender and share your financial information, can demonstrate that you’re in a position to buy a home and that you could be approved for a loan (pending submission of an application and completion of the necessary documents). It does not, however, guarantee a loan.

Preapproval

When you apply for a loan, preapproval means the lender checks your credit reports and financial statements, and then tells you they will approve you for an amount (usually a mortgage, auto loan, personal loan or credit card).

Before making a preapproval loan, lenders typically do a hard check, which will result in a temporary score drop after examining your credit report and other documents such as pay stubs and tax records.

Preapproval allows you to evaluate loan terms and the rates offered from different lenders. Choose one that best fits your own financial situation. Remember, pre-approval is just one step in your home-loan journey: It does not guarantee approval, nor will it likely be provided at the terms specified in your letter of preapproval.

Interest Rates

Interest rates are important factor in case you are planning to borrow. You might heard that word for many times before, but, what do interest rate is and what factors it depends ?
Interest rate are percentage of fixed price you need to pay for the money you borrow. That percentage can be calculated annually, monthly or a day based on many factors such as your credit rating, type of debt, the repayment term of the loan and other factors. Also, they are flexible and can be changed based on the economy and trends of demand for credit at your region or country.

Whatever you wish to use your credit for – be it a house, a car in the showroom or a life-saving operation for a loved one – you should investigate how much you can afford to pay over and above your minimum repayment every month.

Volatility in interest rates, of course, makes borrowing harder – especially since lenders nevertheless calculate your DTI ratio, and (sometimes) react by lowering the total loans they are willing to grant you. On the flip side, with some advance planning and the right moves when you take on borrowing, the costs of borrowing can go down.

Fees

Much has been made of the fact that financial industry terminology conceals borrowers’ intentions while influencing their decisions; however, it is even more important for borrowers to be aware of key terms and conditions – and not be surprised later on.

This is one of the crucial parts of any finance deal, since it specifies exactly what percentage is meant by the ‘lender’s charge’: the actual amount of money that is being lent out when it is borrowed. This could itself be a fixed or variable amount, which is why you might always want to know what an annual percentage rate (APR) is.

However, before they commit to any loan, borrowers should know their rights and responsibilities. The loan agreement must be carefully read by the borrower, ensuring that all terms and conditions, including fees and charges, are fully understood before signing the contract. This way, borrowers will be able to make prudent borrowing decisions that will save them money in the long run.

Loan Amortization

Loan amortisation. This refers to the process in which the book value of a loan steadily declines through payments that the borrower makes regularly, typically through mortgage and car payments. This amortisation allows a borrower to gradually lower the sum of money he owes over time.

For the borrower, early in the term horizon, more of each instalment of principal and interest goes towards interest charges and less, directly, towards reducing the balance of principal than later in the life of the loan, when the relationship is reversed.

Having a solid grasp of what loan amortisation means will help you zero in on more effective forms of debt repayment that align with your financial goals (eg, taking longer amortisation terms might be the most cost-effective method, since it allows for more pre-payment, which allows for greater flexibility rather than locking yourself into a short amortisation period that doesn’t).