How Do Loans Work?

low interest loans

What is a Loan? A loan is a sum of borrowed money. Before you take out a loan, it is important for you to have a thorough understanding of how they work. You will be able to save money and make better decisions if you understand how a low interest loan works.

The Cost of Taking out a Low Interest Loan

It takes money in order to get money- in other words, you do have to pay someone to let you borrow from them in the form of interest on the money that you borrow. A lender may also charge a few fees. You should ask your lender about all of the fees associated with taking out a loan.

Paying Down Your Loan Balance

In most cases, people make payments on loans until the balance is completely gone. A small portion of the interest will be added to every payment that you make. Amortization is what the lender does to spread out the payback schedule over a determined amount of time. Usually, the schedule is arranged so that you pay a portion of the interest and a portion of the amount you borrowed in regular payments. Loans typically have terms, which is the amount of time that you will have to pay back the loan. Credit cards are considered revolving loans. This means that you have the ability to borrow and repay money without paying off the full amount before they loan you a little more.

How to Qualify for a Loan

There are qualifications that have to be met in order to get approved for a loan. Your credit score and history is an important factor because it shows how well you have paid bills in the past. Good credit shows that you have a history of paying things off on time. It will help you get a loan at a lower rate of interest rate, which makes the total cost of borrowing money much cheaper over time. 

Your income will also be taken into consideration before you take out a loan. Lenders want to make sure that you have enough money to pay back the loan. If you do not have good credit, then collateral may be required to get the loan. Collateral allows the lender to take the item and sell it if you are not able to pay.

What Happens if I Cannot pay the Loan?

You probably will not get into any trouble if you skip one payment- there may simply be some late fees tacked on to the next bill. However, if you know you will not be able to make the payment, for reasons of sudden financial hardship like the loss of a job or medical costs, then it is best for you to notify the lender in advance. In fact, your lender will likely work out a settlement with you if you have a good credit score and a history of paying on time. They may even restructure the loan to a low interest loan with better terms (because they would rather get their money back than not!).

However, if you miss several payments, then the lender may take action against you. The missed payments will likely be reported to all of the credit bureaus. Your credit score will go down if missed payments are reported.

The lender can take you to court, but they will usually resort to other methods before they try to file a lawsuit. If you used your house or car as collateral, then the lender may take possession of them as specified in the loan terms. Your debt may also be turned over to a collection agency. You may be subjected to harassing phone calls and letters if your file is sent to a collection agency.

Things can be even more difficult if you get your loan from an online lender. Many people turn to online lenders because they make it possible to get a loan even with a bad credit score. However, online lenders may not be regulated.illegal and these unregistered loan makers may use threatening and abusive methods to get their money back. 

It is easier to work with a legitimate lender if you miss a payment. Therefore, you should check to make sure that do not borrow money from an unregulated source. Also, make sure you ask a lot of questions about the full cost of the loan and the terms of paying it back. Don’t become a victim of being held accountable to a high interest, short term loan that you will have trouble paying back! You can also avoid putting yourself in a difficult situation by only borrowing what you need. Try to pay the loan back as soon as possible.

At Georgia Debt Relief, our staff can help you repair or avoid this kind of financial difficulty. Call our friendly and non-judgemental staff if you are having to fend off creditors or are headed for debt you can’t repay.