Loan | Definition

Credit scores play a crucial role in determining loan eligibility and interest rates, so it's essential to check your credit score and correct your credit report before applying for a loan.

Loans are a common financial tool used by individuals and businesses alike to finance purchases or investments that they cannot afford to pay for or choose not to pay for outright. Below you will learn about four popular loan types, how to obtain a loan, and how to secure a loan.

What is a Loan?

A loan is a financial agreement between a lender and a borrower, where the lender agrees to provide the borrower with a specific amount of money that must be repaid over a specified period of time, typically with interest. Loans can be used for a wide range of purposes, from buying a car or a home to funding a business or paying for education.

Four Types of Loans

1. Personal Loans: Personal loans are unsecured loans that can be used for a variety of purposes, such as debt consolidation, home improvement, or paying for medical bills. They typically have fixed interest rates and monthly payments, and the loan amount and terms are based on the borrower's credit history, credit score, also called your FICO score, and income.
2. Student Loans: Student loans are specifically designed to help finance the cost of education. They are offered by government and private lenders alike. The terms and interest rates of student loans can vary depending on the lender and the borrower's financial situation. Since the repayment schedule for student loans can extend into the decades, much as with a mortgage, it pays to do your research.
3. Auto Loans: Auto loans are used to finance the purchase of a car, truck, or other vehicles. Auto loans are often secured, with the vehicle acting as collateral for the loan. Interest rates on auto loans can vary depending on the borrower's credit history, income, and the type of vehicle being purchased.
4. Mortgage Loans: Mortgage loans are used to finance the purchase of a home. They are typically 30 years in duration, though terms as short as 15 years are available. Additionally, mortgage loans come with fixed or adjustable interest rates and a range of fees and requirements that vary by lender. As with auto loans, mortgage loans are collateral, with the house itself serving as the lender’s security.

How to Obtain a Loan?

Below is a list of five essential requirements and steps needed to obtain a loan.  

1. Determine your credit score: Your credit score is a key factor in determining whether you are eligible for a loan and what interest rates you may qualify for. Check your credit score, and make corrections to any inaccuracies before applying for a loan.
2. Research lenders: Research different lenders to find one that offers the type of loan you need and has favorable terms and interest rates.
3. Gather necessary documents: Depending on the lender and the type of loan you are applying for, you may need to provide documentation such as proof of income, tax returns, or bank statements. 
4. Complete the application: Fill out the loan application, providing all necessary information and documentation.
5. Wait for approval: The lender will review your application and make a decision on whether to approve the loan. If approved, they will provide you with the terms and conditions of the loan.

The Money Wrap-Up

Loans can be an effective way to finance purchases or investments that are beyond your current means, or that will propel your financial future long-term. By understanding the different types of loans available and the steps necessary to obtain them, you can make informed decisions and secure the financing you need. Remember to research lenders and their terms carefully, and to only take out loans that you can realistically afford to repay.