The Basics of Personal Loans and Credit

There are many different types of personal loans and an equal variety of lending sources. While some loans require monthly or even annual payments, other loans require a large single payment of both principal and interest. Typically lenders will ask that borrowers use certain assets as collateral to guarantee the payment of their loans. Still, there are some loans that simply require a borrower's promise of repayment.

Many lenders offer a full variety of loans while others specialize in very specific types of personal credit. Among these lenders, there can also be many differences in credit qualification, fees, and interest rates.

Types of Personal Credit

• Installment credit includes loans that require you to repay the amount borrowed in equal periodic payments, generally monthly. Example: cars loans and high-end appliances.

• Non-installment credit includes single payment loans and open-end credit.

• Single payment loans require that you pay the entire amount that was borrowed on a specified date.

• Open-end credit, or 'revolving credit', allows you to borrow additional funds when needed, as long as your balance doesn't exceed a predetermined limit.

Sources of Personal Credit Include

Commercial Banks, Consumer Finance Companies, Credit Unions, Life Insurance Companies, Savings & Loan Associations, and Brokerage Firms.

The Cost of Borrowing

With many different methods of calculating the interest rates on loans, borrowers are often confused as to the entire cost of borrowing money.

Interest rates depend on numerous factors including:

• The length of the loan,

• The value and liquidity of securities pledged as collateral,

• The borrower's credit history,

• The price the lender must pay for the money that is being loaned

• Economic activity, and

• The policies and actions of the Federal Reserve.

Obtaining a Loan

Before you approach a lender, you need to make some fundamental decisions based on your specific needs:

• How much money you would like to borrow

• The length of time you will need the money

• Your preferred method of repayment

Lenders also have many factors to consider before making a loan. The key variables in evaluating loan applications include: credit reports, character references, collateral, your capacity for repayment, and financial assets you own.

Maintained at one or more credit bureaus, your credit file contains personal information including: your name, Social Security Number, birth date, current and past addresses, current and past employers, and whether you own or rent your home. In addition, it encompasses information such as your income, checks that have been returned for insufficient funds and a detailed record of all of your credit dealings.

Credit professionals suggest that every three to four years, and at least six months before you apply for a large loan, you should carefully review the information in your credit files at any or all of the three national credit bureaus: Equifax, Trans Union Credit Information Company, and TRW.

Managing your Credit

Your ability to handle credit is influenced by many of the following factors: your current and future income, your current and future expenses, the interest rate on your loan, borrowed money, the payment terms on your outstanding loans, and perhaps the most critical, your own financial discipline.

Determining your debt limit

Many planning specialists suggest this standard measure to determine if you have taken on too much debt.

 

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