How Does Loan Term Effect Your Credit?
If moneyveo 've planned to get something on credit or if you need money urgently, then a loan is exactly what you need. For most people, a loan is a useful way of purchasing things they need but cannot afford with cash. Financing is really when money is lent to an external party beneath the condition of repayment of the loan principal amount plus interest over a period of time. In simple terms, a loan is a form of loan that is granted to someone else. You can find different types of loans available for sale. These loans are categorized according to the term of repayment, the total amount and reason for the loan and of course, the borrower's financial capability.
Loans can either be secured or unsecured. Secured finance are those that are granted on the basis of something tangible such as a property. They are generally repaid over a long period of time as agreed and with heavy interest rates. Lenders, usually the banks, think about this type of loan as an improved option than an unsecured loan because they are backed by something that can be taken back.
On the other hand unsecured loans are the ones that are granted based on credit. Lenders feel more secure about lending you money in case you have at least a good credit limit or have enrolled in a secured credit line. The reason being that these kind of loans carry higher interest rates and a shorter repayment term.
Credit worthiness is considered a significant factor in deciding whether you can get a loan or not. There are lots of factors that lenders consider. Factors like credit history, current income and employment status etc. play a significant role in deciding your creditworthiness. These factors, subsequently, have several implications on your loan interest rate.
In simple words, loans work on the principle that a loan is granted once the risk to the lender is lessened. For example, if you have been making payments on time, the lender knows that you will pay back the loan. In the event that you default, then your risk to the lender increases and they will charge a higher interest rate. This is one way loans work. You have to be creditworthy for them to provide you with a loan.
As far as the many kinds of loans are worried, you can find two major categories. The initial category includes secured finance which are given from the basis of security, usually your home or car. Secondly, short term loans can be given. These loans do not require collateral. But, unlike secured finance, the borrowers who choose unsecured loans must have an excellent source of income or job.
In case of a secured loan, the lender will calculate how much cash you can borrow before charging a rate. The rate will also depend on the credit limit that the borrower has requested. The credit limit may be the maximum amount that the borrower can borrow before the lender will consider his loan to be secure. The higher the credit limit, the higher rate will undoubtedly be charged. Similarly, the repayment period and the monthly installment will also affect the rate of your loan.
Another important factor, which affects the rate of your loan term, can be your creditworthiness. The creditworthiness of a borrower depends upon the Fico score. Your credit score is calculated in line with the amount of credit that you have previously taken and the repayment history in the previous loan term. If the existing financial conditions have worsened your creditworthiness, then your lender may think about your loan term as unfavorable and thus charge a higher interest. Thus, it all depends upon your creditworthiness to decide how much cash you can borrow.