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03/26/2008

Need a Loan?

Ready for that new car? Looking to buy your first house? Chances are, then, you'll be looking for a loan to help you out. Here are some basics on how to choose the right one for you.

Basics of a Loan

Getting a loan from your bank isn't quite like having a buddy loan you his car for the weekend. First off, your friend probably won't make you sign any papers. Second, if you return the car just as shiny and perfect as when you got it, everything's cool- end of transaction. You may want to fill up the gas tank just to be nice, but there's nothing else owed. A bank, however, will charge you for borrowing money. This is the interest rate. The interest rate is a percentage of your loan and so varies with the size of the loan. So, as you pay the bank monthly you are paying off not only the initial loan amount, but an extra portion of that loan.

Another aspect that will determine the amount of your monthly payments is the span of the loan- the longer the span of the loan, the lower your monthly payments. In trade for this, though, you will get higher interest rates and be paying more over all. So, if you can afford to pay more now, go for a shorter loan because you will end up paying less. If you are lucky enough to find a way to pay off your loan in full before the term is up, be cautious, you may have to pay for ending the loan early.

Don't be surprised when asking for a loan if the bank asks you a few personal questions. The meeting can feel awkward and appraising, like a first date, only with references. During the meeting you may be asked about your credit history and your financial situation- are you making enough to take on the burden of monthly payments? Also, if you happen to lose your job and default on your loan, what assets do you have to use as a collateral? You shouldn't take any of this personally; it isn't a judgment on your character as a person, only as a debtor. The lender is always taking a risk giving out money; they just need to protect themselves.

Types of loans

There are secured and unsecured loans. Secured loans are those that require collateral such as your home or car. Many mortgages are set up so that if you default on your loan, the house will go to the lender to pay them back. Unsecured loans are those that don't have any collateral, such as credit cards. Other types of loans range from payday loans that are small amounts of money with a short term and a very high percentage rate to a 30 year fixed rate mortgage which means the interest rate will stay the same as you pay it over 30 years. The types of loans vary so greatly depending on their purpose and amount it's hard to say which is best. Of course, if you can afford it, paying it off sooner and getting a fixed rate is better. It all depends on your needs and your abilities.

Given the state of the economy, getting a loan these days is trickier than it was in years past. Knowing the nuts and bolts of a loan is essential not only to obtain one, but to handle it the way it should be handled.





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