Taking a loan is a big decision. While it can fulfil your short-term or long-term financial needs, you also have to feel the burden of repayment. Nevertheless when a financial emergency strikes, a personal loan can come to your rescue. However, before you borrow, it is important to know how loans work. By understanding the loan system, you can save money and make better decisions.
€ Cost of money
When you borrow, you not only have to pay back the borrowed amount, but also add interest charges to it. It's important to be aware of the interest rate being charged. Calculate the total cost to you after including interest. Costs can be tricky. Don't forget to calculate interest rates and transaction fees.
€ Repaying the loan
Try to understand the repayment system. Most loans get paid off gradually in the form of monthly payments - split into interest cost and loan balance. Learn how the monthly payment system works, and how interest cost goes down gradually.
€ Qualifying for a Loan
Learn the eligibility criteria of different lenders. Are there credit checks involved? Does the lender need you to submit paperwork? Is the loan application process simple? How long does processing take place? Do you have a poor credit history? A good credit report means you will easily get a loan at a reasonable rate, while a bad credit score may make it difficult to secure a loan. The lender would be interested to know if you have enough regular income to pay back the loan. Some lenders may be willing to lend if you can pledge collateral as security while some others may offer unsecured loans or require a guarantor to guarantee repayment on your behalf if you fail to repay on time.
€ Loan approval
When you submit a loan application, the lender will evaluate your application to determine whether you qualify for the loan. If you meet the eligibility criteria, the lender will be willing to offer a specific amount of money. When you're approved, they will intimate it to you and credit the funds directly to your bank account. Within a month of funding, the lender may require you to start repayment as per the agreed upon loan terms. Usually lenders set a monthly repayment schedule for borrowers to make small payments with interest. Most borrowers prefer to repay the loans early. A loan repaid in time gives immense satisfaction and also helps you build a positive score.

€ Loans from Family or Friends
Obtaining a loan from a family member or a friend is often all that is needed for small business owners. There are of course many benefits to getting this type of funding. First, the funds are typically available quickly once the terms have been set. And, the interest rate is often far less than what a bank or other lender would be offering. However, there are often strings attached to a loan from a loved one. To prevent any conflict or confusion down the road, it's always a good idea to clearly spell out the terms of the loan and clearly define if the money is a loan or a gift. Having clarification up front is essential for keeping the peace.
It will help to figure out how the loan system works before you borrow!
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