The word loan essentially refers to a sort of financial transaction where a sum of cash is borrowed by another party against an agreed period of time from a lender. In most instances, the borrower also extends finance charges and […]
The word loan essentially refers to a sort of financial transaction where a sum of cash is borrowed by another party against an agreed period of time from a lender. In most instances, the borrower also extends finance charges and interest on the borrowed amount as well as the total principal balance that the borrower has to repay after a certain period. The total debt owed on a loan is calculated at the time of borrowing.
The loan term is the period of time over which the loan payments are due. Generally, loans are given for a minimum of five years. However, under certain circumstances, the five-year loan term could be extended by one year if the lender and the borrower agree. If at any point of time the loan term is extended, the repayments that have been made on the earlier period of time would be reflected in the new loan term, with interest and other charges being applied according to the new loan term. This could make it difficult for the borrowers to keep up their debts under the new loan term.
Another reason why the revolving loans allow borrowers to borrow more than they could at one go is because the amount of the next loan can be borrowed again, at any given point of time, even without any additional charges or fees. There is a limit, however, as to how much of the total cost of the previous loans can be re borrowed. The limit of the amount that can be borrowed varies, depending on the total cost of all previous loans. It is basically a fixed cost structure.
The lender and the borrower also agree on the repayment format. Many lenders provide a range of loan terms such as balloon payment and extended payment terms. In order to comply with loan terms, it is advisable to seek the advice of a lawyer who will ensure that all clauses are understood and that the agreement is drafted to avoid violation of the contract by either party. A lawyer also ensures that the borrower does not pay more than the minimum required amount, with interests and penalties being applied in case of default. They also ensure that all legal clauses are complied with and that all applicable laws are followed.
With fixed and balloon payments, the payment schedule ensures that the principal is paid off over a certain period of time. In such cases, there is an interest rate that has to be paid on the loan balance every month. This interest rate is based on the prime rate prevailing at that time. Most borrowers prefer lump sum loan payments as they revert to the lender in case of late payments without a balloon payment.
Many people prefer a single monthly payment, with the payment amount being spread across several years. This is usually done when the total amount of the loan and the interest rates are less than what a borrower would have to pay if the loan were a larger one. The monthly payment is then spread out so that the total amount due is equal to or less than the total of the monthly payments. The advantage is that this type of loan has a fixed interest rate and monthly payments and thus can be counted on to earn a regular return. It is also good for people who do not want to be tied down with longer loan terms.