When you enter into a financial transaction whether it is borrowing money or lending money, you must know about its intricacies and working principles. This will enable you to know where exactly you stand, what exactly you can expect and what you can do to avoid unfortunate circumstances and its consequences.
When you know how loans work you can also save money with a better understanding, proper planning and by making better decisions about your debt or loaned amount.
Cost of Money
The basic principle in money lending business is to give money to people who need it and have the ability to repay it along with the interest and other fees charged on the principal amount. Therefore, to get or make money you will need more money.
- Apparently, the working process seems to be very simple where the money satisfies the needs of the borrower and the creditor earns money in the form of interest. However, there are more to it and it is a very complex calculation.
- Both the borrowers and the creditors need to make proper and extensive calculations so that both are miles away from any unfavorable and unfortunate situations.
- The borrower must calculate monthly income and expenditure and make the necessary adjustments to have enough money to repay the monthly bills on time and on a regular basis.
On the other hand, the creditors must find out the credibility and ability of the borrower to repay the loaned amount, the amount that should be granted, the monthly EMIs that should be charged considering the interest and much more.
Cost is the Key
Therefore, the cost is the key factor in the loan market and it is also the primary factor that will make you understand how loans work. It will also help you as a borrower to choose the right type of loan for your needs when you visit libertylending or any other lending company for that matter.
Both for the lender as well as the borrower the best way to rake or make a loan and to manage it efficiently is by minimizing the cost of it. However, these costs are not very easy to understand always for a borrower.
Usually, the lenders do not often explain how loans work and what the exact costs of it are. Therefore, it will pay you off well if you run all these numbers yourself.
- For this, you will need the basic Loan Amortization Calculator which works for all types of loans to know how loans work.
- Use a spreadsheet and change the different variable to see how it affects your loan and its costs.
Remember, costs of a loan can be very tricky and there are a lot of factors to consider such as the rate of interest, loan origination fees, and transaction fees, late fees and penalties and a variety of others that affects the working of a loan.
Qualifying for a Loan
When you are well aware of the cost and other factors, you will now need to know the other aspects of the money lending market and process. To start with you must know that if you want to get a loan, you will have to qualify or pass the specific evaluation process to be considered as an eligible borrower. The common factors that are usually evaluated by the lender include:
- Your debt to income ratio to determine your ability to repay the loan amount
- Your current debt obligations
- Your credit score and history
- Your credit limits and the part of it used thereof
- How you have used your previous loans and much more.
It is only when you have a good credit that you will get a loan easily and that too at a reasonably fair rate.
However, good credit does not mean you can borrow a large amount of money from the money lender. In such cases, the creditor whether it is a bank or any private money lender may ask for collateral. This is done to secure the loan so that it will allow the money lender to take it and sell it in case you fail to repay the huge amount of loan.
You may even be asked to bring in a guarantor for your loan who has good credit to co-sign the loan. This means that the co-signor promises to repay the loan in case you cannot.
Working Process of the Loan
In practice and in everyday life the working of a loan is not as simple as the borrowing process in general. When you want to borrow money, you visit any bank or credit union or any specialized lender like a peer to peer lending service or a mortgage broker and apply for a loan.
- In the application, you will need to provide all personal information, furnish income proof and other relevant and required documents.
- The lender then evaluates your application and decides whether or not to provide you with the loan. If your loan application gets approved the lender will give you the money if it is a personal loan or send the funds to the person you owe the money directly as in the case of buying a house, for example.
- Soon after you receive the loan, you will start to repay it usually from the next month itself and continue paying the monthly EMIs for the entire loan tenure.
However, if you want to save money on your loan repayment, you can always pay your loans early but make sure you figure out the additional costs if any for prepaying your loan. Also, make sure that it makes perfect sense and is beneficial to you financially.
A loan is a loan if only you pay it back gradually over time. Each EMI is usually fragmented into two parts. One part is the loan balance and the other is for your interest cost. If you follow the loan amortization table, you will know that it is the interesting part that is major initially and it goes down as you continue to repay your loan over time.