When talking about lending or loans, what we are really talking about is credit. Credit is money you ask for to pay for something. You promise to repay this money, plus an additional amount, usually called interest.
Used carefully, credit can be extremely useful. On the other hand, if not used responsibly it can cause major problems. “Good credit” typically means that you repay your loans on time, and don’t abuse the credit limits given to you. The better you maintain your credit today, the easier it is to obtain credit in the future.
When obtaining credit, there are usually additional costs associated with your transaction. This is called the “Cost of Credit”. Financial institutions can charge various fees depending on what type of loan you are given, and what you do with it. As an example, when using your credit card you expect to pay interest on any balance owed. However some cards also charge an annual fee, which is added to your balance. Cash advances and late payments also incur additional fees and can increase your interest rates. Mortgages and car loans also sometimes necessitate closing costs or down payments when opening the loan.
All these examples, plus interest, should be factored into your decision making when deciding to get a loan or not. But don’t be discouraged, the Truth In Lending Act helps protect the consumer by requiring lenders to disclose the amount financed, annual percentage rate, finance charge, and total amount of payments on contracts for loans.
While the cost of credit can sometimes seem high, keep in mind that getting a loan through a bank is normally less expensive than some alternatives that are out there. One alternative is rent-to-own. This allows you to use a product while making weekly or monthly payments on it. If you intend to buy the product, the store makes a payment plan for you to eventually own the product. The difference between this and a normal loan is that legally the store owns the product until you make the final payment. If you miss a payment, the store has the right to take the merchandise back, in which case you lose all the money you’ve paid. Also keep in mind that adding up all the payments you would make in a rent-to-own arrangement is typically higher than if you had gotten a loan through a bank.
Another alternative to bank loans is “payday loans”. These services are based upon people needing money immediately, with the intent of paying it back on their next payday. Typically the interest rates are very high, and if you miss any payments, the fees can make the cost of credit skyrocket.
Having reviewed some different types of loans and lending institutions, you may also consider what factors go into the loan approval process? When you submit an application for a loan, there are several things every loan officer will take into account before making a decision.
The first is capacity. Does this person have the capacity to repay this loan based on their current financial situation. How much do they make? How much do they owe on other debts? How long have they been on their job? What kind of work do they do? These are just a few of the questions related to your capacity to repay a loan.
The next is capital. What is your net worth? How much do you have in savings? Checking? Investments? Typically this is more a factor in getting a mortgage than any other type of loan.
After this, they will look at your financial reputation, typically by reviewing your credit report. Here they will be able to see what kind of credit you have had in the past, what you currently have, your pay history, balances, limits, and more. And more often than not, the better your credit history, the less important the other factors come into play.
And lastly, they will look at the collateral being given for the loan. If it is a car, what kind of car is it? How old? How many miles? What is the current value of the car?
So with all these questions being asked by others, here are some questions you should be asking yourself:
· Do I need this?
· Do I need this now?
· Can I wait until I save enough money to buy it without a loan?
· Can I get credit?
· How much more will it cost me to get a loan than to buy it in cash?
· Can I afford the monthly payments?
· What is the total cost of credit?
· Are there other fees or expenses associated with this loan?
· What is the annual percentage rate for this loan?
Once you get a loan, here are some tips on maintaining your credit:
· Pay as much as possible towards your loan each payment cycle. This minimizes the amount of interest paid and shortens the length of time you will have to repay the loan.
· Always pay on time to avoid late charges or rate hikes.
· Always review your monthly statements for errors.
· Be careful when offered deferred payments on loans. Often while you are being allowed to skip a payment, your interest is still being accrued.
For more tips and information on our free credit seminars go to www.DLRCreditSolutions.com.
Steve De la Rosa has worked in all aspects of consumer lending for nearly a decade. From credit cards to lines of credit, auto loans to home mortgages, home equity loans to personal loans, De la Rosa has worked with consumers from the lending side and has seen the credit market become increasingly difficult for consumers to navigate. Steve has helped people with foreclosures, repossessions, bankruptcies, collections, judgments, charge offs, and more get the loans they want at interest rates they can afford. Now he wants to use our experience to help YOU find your way to credit success.