As people plan to take out loans and handle their finances in 2023, there are plenty of things to pay attention to. It might not be the trickiest thing in the world to handle the loan application process, but understanding the terminology and what to look for will usually end up getting people the best deals.
From terms to know to the types of personal loans out there, the best way to make decisions is to stay prepared. Dutton Lending knows that those searching online to see what they can find can make smart decisions if they have the necessary knowledge.
Terms To Know When Applying For Loans
When applying for a loan, there are several key terms that a person should be familiar with. Knowing a few of these terms below will make life a lot easier.
Principal – The amount of money borrowed by someone.
Interest rate – The rate at which interest is charged on the loan, usually a percentage of the principal. The lower the percentage, the better savings a person will have.
Collateral – An asset, such as property or a car, that is used to secure a loan. Some personal loan companies will ask for collateral, and it’s largely dependent on the amount of money taken out.
Credit score – A numerical representation of a borrower’s creditworthiness based on credit history. If the loan is a relatively low amount, a credit score might not even come into play. However, those taking out a lot of money will have their credit pulled.
Term – The length of time that a loan will be outstanding, usually measured in months or years. A longer-term usually means that a person will pay more in interest. The goal should be to shorten the term of a loan as much as possible.
Amortization – The process of paying off a loan through regular payments, which include both interest and principal. There’s usually a little bit of an incentive to pay off a loan faster to save on interest.
Origination fee – An upfront fee charged by the lender for processing the loan application. This is more commonly found through traditional loans. Online companies tend to waive any origination fees to bring in new customers.
Prepayment penalty – a fee charged by the lender if the borrower pays off the loan before the end of the loan term. This is a controversial penalty, as a lot of lenders have started encouraging faster repayments instead.
Cosigner – A person who cosigns a loan with the borrower and becomes legally responsible for repaying the loan if the borrower can’t. This usually happens because a person has no credit, low credit, or needs a little assistance beyond what they can get themselves.
Default – A failure to make payments on a loan according to the terms of the loan agreement. There are usually pretty stiff penalties for defaulting on a loan.
The Most Common Types of Loans
Investopedia / Dennis Madamba
Now that a bit of terminology is covered, knowing the types of loans matters as well. Several types of loans exist that individuals and businesses can use to borrow money. While there are specialized loans for pretty much anything, some of the most common types of loans are below.
Personal Loans
These are unsecured loans that individuals can use for a variety of purposes, such as consolidating debt, paying for a home improvement project, or financing a vacation. Personal loans typically have fixed interest rates and fixed monthly payments.
Mortgages
These are loans used to purchase real estate. There are several types of mortgages, including fixed-rate mortgages, adjustable-rate mortgages, and government-backed mortgages. The interest rate and terms of a mortgage can vary depending on the type of mortgage and the lender.
Auto Loans
These loans work to purchase a vehicle and have specific terms and interest rates. Interest rates can be negotiated with the lender.
Student Loans
These loans are used to pay for higher education and can be obtained from the federal government or private lenders. They may have different interest rates. Federal student loans may have fixed or variable interest rates, while private student loans may have fixed or variable interest rates.
Business Loans
These loans work to finance the operations of a business, such as purchasing inventory or equipment, hiring employees, or expanding the business. Business loans can be secured or unsecured and may have different terms and interest rates depending on the lender and the type of loan.
Payday Loans
These are small, short-term loans typically used to bridge a gap in funds until the borrower’s next paycheck. They usually come with high-interest rates and are not recommended for long-term solutions.
Line of Credit
This flexible loan allows the borrower to access funds as needed, with interest only charged on the amount borrowed. Borrowers can access this credit up to the limit approved by the lender.
What To Expect With Loans
Personal loans in 2023 should be easier than ever to obtain with more and more competition out there. Dutton Lending has been around for a long time, and they rely on their quality reviews and accountability to stand out from the rest.
Interest rates should stay relatively the same, but what hurts people is if a recession truly hits people hard. When people are laid off from work or can’t find work, they have to find alternative ways to pay bills and make ends meet. A personal loan might be an immediate type of assistance.
