Loans

5 Concepts You Should Know Before Hiring a Loan

Five concepts you should know before hiring a loan

There are many reasons to take out a personal loan and to be able to get the liquidity needed to meet an expense. Whatever the reason, the important thing is to know well what a loan is, its operation and the keys to get the best loan in terms of cost and other conditions.

To do this, there are at least five loan concepts you should know:

APR

This is the equivalent annual rate and reflects the actual cost of the loan. The APR is expressed as a percentage and is decisive when comparing loans on the basis of cost. The APR includes not only the price at which the bank lends the money, but also the expenses and commissions that the loan has. In this sense, whenever you want to compare loans, it is better to look at the APR and not just the TIN (Nominal interest rate) which only includes the price of the loan and not the other expenses.

Repayment term

This is the time the loan holder has for the loan repayment. In general, personal loans do not usually have a repayment term of more than 8 or 10 years, although it is true that this is influenced by the amount of the loan.

It is important to know that the longer the term, the more comfortable the monthly installments will be, but the more expensive the loan will be as more interest will be paid for longer time the money without being returned.

It is advisable to establish a repayment term taking into account the fee that can be assumed each month depending on income, and it is optimal to repay the loan in the shortest possible time.

Debt ratio

This will be one of the areas where institutions focus their attention when assessing the applicant. This is the percentage of income to be used to pay the loan. The rest of the existing loans or credit operations play a key role here. In any case, it is recommended that the debt or effort rate should not exceed 30 per cent of income and should never exceed 40 per cent.

Commission fee

Not only do you have to pay attention to the interest rate that applies to the loan, but also to the other costs that it may incur and that may make the loan more expensive. We are talking about the commissions, which we remember are agreed between the parties. The most common fees are the opening fee, which is charged for formalizing the loan; the partial or total early repayment fee, which is very important if you want to cancel the loan before maturity; and the late fee, which may not exceed 2.5 times the legal interest of the money.

Personal guarantee

In personal loans the guarantee that the amount will be returned is as its name indicates personal. This means that, in the event of a default on the part of the loan holder, both present and future assets will be used for the payment of the debt. While, in mortgage loans, the collateral is the property in addition to the personal, in the personal are your present and future assets.

If there are guarantors and the default occurs, it will be the guarantors who respond to the payment of the debt also with their present and future assets up to the payment of the amount owed.

If you want to compare among the best loans on the market, we recommend you visit our loan comparator and find out which one best suits your needs according to its characteristics.

About the author

Frank Ramos

Frank Ramos

Hello, I am a savings economist at GrayAction and an expert in personal finance. I hold a master's degree in economics from Stockholm University. I hope you will enjoy reading my articles on finance categories on the site.

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