How To Understand Loan Terms

Financial institutions such as banks and insurance firms offer loans to individuals usually after the latter provide some form of collateral to guarantee the repayment of the loan. The collaterals are mostly landed or fixed assets that the borrowers own, such as their homes, but can also be assets such as vehicles or businesses.

Whatever the collateral, a borrower, however, must ensure he understands clearly the terms associated with the loan.

Interest Rate:

This is usually one of the first factors a borrower has to take into account and be most concerned with. Lenders have varying rates to offer but they are generally determined by a person's credit score, which means, they depend on the risk level a lender is willing to take when crediting a person.

By securing collateral in exchange for the loan, the lender reduces the overall risk due it considerably. If a borrower fails to pay back the loan, the lender gets to keep whatever collateral has been offered.

Terms of Collateral:

Another key factor, collateral terms, determine how quickly and under what circumstances a lender can claim right over the collateral. A borrower should therefore, understand the terms clearly to avoid any misunderstandings. Sometimes, a lender can come after the collateral within 30 days, while others let some more days of non-payment pass before calling up.

Loan duration, EMIs:

These two factors are also important for a borrower to understand. EMIs sometimes comprise only the interest part for the initial months while the principal remains the same. Further, the longer a loan term, the lower the EMI amount, but the interest rate will be higher. This means the borrower is paying more for the money.

Penalties and Fees:

A borrower should ensure he understands the fees and penalties for repaying the loan early, for missing payments, for late payments, for refinancing of the loan, among others.

If the above factors are not considered properly before securing a loan, paying off the amount at a later stage could become a huge headache, especially if there happens to be a financial setback.

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