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Understanding The Risks and Rewards of Taking out a Loan #financefriday #money

Finance Friday: The Risks and Rewards of Taking out a Loan

Many people get nervous at the thought of taking out a loan, mostly because they do not fully understand the premise of it. Like almost everything else in life, there are risks and rewards of taking out a loan, therefore, before you make a decision to borrow funds, you need to understand the partnership you are getting into, so that you reduce any negatives that can arise.

A loan is a financial partnership where a secure lender gives a borrower a sum of money with the intention of being repaid with interest on or before the agreed upon due date. It’s really that simple. The borrower shouldn’t be someone that is in extreme financial misfortune, instead, the ideal borrower can be a person experiencing a temporary financial imbalance, and a lending company such as a MaxLend loan can then be used to offer a brief monetary band-aid. 

Different Types of Loans:

Personal loans: A personal loan is offered by banks and other financial institutes in the amount of few hundred dollars to a few thousand dollars. To be approved, the borrower needs income verification and a decent credit history. The funds borrowed can be used for anything such as home repairs or to purchase a vehicle. The minimum balance with interest is to be repaid by the monthly due date. 

Payday loans: A payday loan is a type of short-term, high-interest loan offered by lending institutes. The premise is that the borrower borrows a few hundred dollars and pays it back with interest on his or her next payday. Payday loans tend to have a high approval rate, and high interest rates because a person’s credit score is not usually a factor. All that is needed is employment verification and a checking account.

Installment loans: MaxLend Loans offers installment loans, by which the borrower borrows a specific amount of funds and agrees to repay in fixed monthly installments. The borrower’s credit score, checking account and employment verification are usually required. 

Small business loans (SBL): Small business loans are given to entrepreneurs by banks and other SBL lending facilities. A formal business plan, decent credit score, proof of financial stability and at least twenty percent cash on hand is required for approval.

Home equity loans: A home equity loan is a type of personal loan offered by banks that uses the home’s equity of the borrower as collateral for repayment. If the loan is not repaid on time, the bank can then sell or auction off the house.

Loans are meant to relieve financial stress, it will only become a negative situation if the borrower fails to repay the funds you borrowed. Typically, if you miss a loan payment, the interest rate may go up and it can reflect negatively on your credit report – making it more difficult for you to secure more loans in the future. If you find yourself in extreme financial misfortune, you should avoid taking out a loan, instead, you should focus on ways you can make more money such as getting a higher paying job or cutting costs with your current bills. Additionally, if you do take out a loan and realize that you will be late on a payment, you should call the institute to professionally discuss the issue. 

The key to knowing whether a loan is right for you, is based on your ability to pay and the interest rate the loan is being offered. My rule of thumb is the higher the interest rate and loan the sooner you need to repay the loan. Whenever you have an opportunity to pay back a loan, always repay more than the minimum balance. If you have an opportunity to repay the loan even before the invoice or bill is received, that is the most ideal situation.

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