A loan is a term denoting a type of credit. The sum of money is delivered to a borrower in exchange for the following refinancing of the money advance. In almost every case a lender charges interest and finance payments over the top of principal amount of a loan. Interests and rates are designed to reward the lender for his work.
A borrower and a lender agree on the terms of the contract before the loan amount is given out. Loans come in many different types. They can be: secured and unsecured. In the case, where a loan is secured, a lender requires to provide some of the borrower’s assets to protect the loan. A collateral will be outlined in the agreement. For instance, if a borrower lends money to cover the purchase of a property, mortgage becomes a collateral.
An individual, organizations or governments can apply for a loan. The main purpose of taking a loan is an overall upturn.
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What are loan payments called?
When a potential borrower decides that he needs money, he goes to bank or turns to a financial organization. A lender, in his turn, requires to provide personal information like the purpose of the borrowing, financial history, Social Security Number, and some other details. The lender also analyzes the data including an applicant’s DTI ratio to make sure if he is able to pay back the loan. An application can be both denied or approved, depending on the applicant’s creditworthiness. In case when an application is denied a lender must provide a ground for denial.
Each loan is divided into several payments. Each payment must be refunded in full and on due date. The amount of each payment and repayment date are specified in the contract. Loan payments by equal periodic amounts planned to pay off the debt at the end of a fixed period, including interest on the outstanding balance are called amortization.
What are the 3 parts of a loan?
If the application is approved, both sides sign an agreement that outlines the details of the contract. All loans include 3 parts: the interest rate, security component and term.
The Interest Rate
A lender charges interest rate to compensate the use of the money. This constituent is a small part of the whole amount borrowed. Fixed and adjustable interest rates exist. The first type of the interest do not change over the repayment period. For instance, if your fixed interest rate is 9%, it will be 9% for the entire period of the loan repayment. Adjustable rates can steadily change through the period of repayment and this type of rates is based on prime interest rate. For example, you may take out a loan with a variable rate at prime +2. This means that you’ll pay two percent more than the prime rate, regardless of what it is.
The Security Component
Loans can be secured and unsecured. The security component refers to whether you put a collateral, to secure your loan, or not. If your loan is a secured one, it denotes that your lender is sure that the loan will be repaid. If it happens that you do not manage to refund the loan on time, the creditor can confiscate the collateral to compensate the investment. The secured loans let the lenders to charge lower rates.
Unsecured loan does not require a collateral. It means that a loan organization is not protected from the delinquency. Therefore, an unsecured loan has higher interest rates. Some lenders require that a secondary person co-signs for unsecured loans.
The term
The term of the loan is a period of time during which the borrower has to repay the loan. Usually, a loan has term of one to five years. If it is a student loan, 10-year repayment period is expected. Therefore, the longer the repayment term, the higher the interest rate. It is important to repay the loan on a due date, because if ignoring it can cause bad consequences for the future credit history of a borrower.
What are the terms for auto loans?
There are two types of auto loan: short-term and long-term auto loans. Short term auto loans are loans made for the buying of a new or used vehicle. The payments are usually from 12 months to 36 months. This loan is designed to help a consumer quickly pay off a loan for a new or used car. However, short-term auto loan payments imply higher rates.
Long Term Auto Loans have repayment duration from 36 months to about 84 months. This type of loan is designed to let the customer to make more reasonable monthly payments on a car or truck.
However, the amount of interest increases dramatically. The increased interest can significantly enlarge the final cost of a credit for a new or used car or truck.
What is the 20 4/10 Rule for car loans?
The 20/4/10 rule of thumb for purchasing a car helps you obtain a vehicle that will not damage your budget. The rule implies that a borrower makes a 20% down payment on a four-year car loan and spends not more than 10% of his monthly earnings on transportation costs.
Auto Loan Glossary
If you decided to purchase a car, it is important to be well-informed about all terms or phrases you may meet. This auto loan glossary explains the common terminology.
A
Amortization
A loan repayment made in regular installments in order to refund the principal part of the loan plus interest.
Annual Percentage Rate (APR)
The Annual Percentage Rate (APR) is a rate including all costs paid to satisfy the loan. In other words, the percentage correlation between the final finance fee and the sum of the loan.
Application
The basic statement containing personal and financial information designed to estimate an applicant’s creditworthiness.
Asset
A corporeal value owned by a borrower. It can be real estate property, personal belongings or bank accounts, stocks, mutual funds.
B
Borrower
A person who gets credit from a creditor, realizing that it must be refinanced, with interest, within a certain period of time.
C
Co-Signer
A person who guarantees to refund the loan in full in case a borrower doesn’t manage to meet the terms of the contract.
Collateral
An asset that protects a loan from being unpaid. If the borrower fails to repay the amount of money he borrowed, the collateral will compensate the loss.
Credit History
An information about fully repaid and unpaid debts. A credit history helps a creditor to make sure that a potential borrower is able to repay the loan.
Credit Score
A system of risk evaluation. It is based on the data provided in the application.
Creditor
A person or organization who offers loans and to whom a borrower must repay the loan.
Creditworthiness
An estimation of borrower’s ability to refinance the loan. This determinant is based upon borrower’s financial information including the number and types of accounts and payment history.
D
Debt
An amount of money that is owed.
Delinquent
The default on repaying the loan on time.
F
Finance Charge
A dollar amount defining the cost of credit.
I
Interest
The cost of borrowed money, usually stated in terms of a percentage.
Interest Rate
Interest rate is the yearly fee that the creditor receives on the top of principal of the loan.
L
Lender
An individual or financial organization who gives funds to a borrower with the understanding that those funds must be refinanced fully plus interest.
Loan
The sum of money given to a borrower with the condition of repaying it on time and in full.
Loan Term
The duration of credit, divided into months. It is planned by dividing the price of a vehicle by the sum of the loan.
M
Monthly Payment
A payment including principal and interest. The borrower must repay it every month.
Motorcycle Loan
Motorcycle Loan is a loan that must be secured with collateral — in this case, the asset is the motorcycle itself. When you apply for a secured loan, mind the fact that your property can be repossessed by the lender if you do not manage to repay the loan on time.
N
No Store Visit Auto Loan
No Store Visit Auto Loan is a loan, which doesn’t require your attendance when applying for it. The application process is usually performed via the phone or laptop.
Q
Qualify
The borrower’s ability to fit the lender’s requirements.
R
Rate
A rate is a fixed price charged for services or loans.
Requirements For Auto Loan
The Requirements for Auto Loan is a list of conditions that a borrower must follow in order to get an auto loan. This list usually includes ID, proof of steady income, credit history, insurance, information about vehicle.
S
Secured Loan
A loan that is secured by asset.
Security Interest
A charge which secures performance of a repayment of the credit.
T
Term
The life-time period of the loan. Every loan has its own fixed repayment terms. They can very from two weeks to several years. Usually set in contract.
Online Auto Loan from direct lender
Online Auto Loan from direct lender is a credit that you apply for via the Internet. The application approving system of a direct lender reviews the information you provided. In a few moments you receive a report from a lender.
Title Loan is a great opportunity to cover unexpected expenses. The main characteristic of an auto title loan is that it uses your car as a collateral. When used wisely a title loan becomes the life-saver. Your good credit score can help you to receive a loan with the best rates and terms. Mind the fact, that repaying the loan on time is very important and can help you to improve your credit score.