Getting a loan has become a streamlined, automated process. Still, there are questions people have regarding types of loans and how the process works. Here are some of the most frequently asked questions (FAQ) regarding loans.
How to get a loan with bad credit?
The lower your credit score, the less likely it is to qualify for a loan. A poor credit borrower may be able to get a loan with higher interest rates. Those with poor credit should be working on ways to improve their credit score, even as they apply for a loan.
- Consider having a family member or close friend co-sign. The co-signer is assuming responsibility for payment of the loan if the borrower cannot pay. They need to understand this before applying.
- A payday loan is a popular option for those with poor credit because they receive a short term loan that is helpful in an emergency situation between pay checks.
- Look for lenders who provide short term secured loans. These loans are available to those who have collateral, such as a vehicle title. If the borrower fails to pay off the loan as agreed, the lender may take possession of the secured collateral.
What is an FHA loan?
A Federal Housing Administration (FHA) loan is a mortgage that is insured by the government. Programs were established by the federal government as a means for people with poor credit and low income to be able to purchase a home. Qualifying for an FHA loan is easier for these groups of people. Among the features of an FHA backed mortgage is a lower down payment.
What is a home equity loan?
A home equity loan is a type of second mortgage that allows a homeowner to use the home’s value as collateral. The value of the home equity loan is an amount up to the difference between what the home is worth and what has been paid towards the principal on the first mortgage.
What is a subsidized loan?
The cost of higher education can be substantial. The federal government offers programs that help qualified students pay for a large part of these costs. There are caps on the amount a student may receive based on the year of the program they are in. The subsidized loan covers a portion of the student’s education costs and is only for undergraduate programs.
How to get a business loan?
Business loans are intended for things like expansion, equipment acquisition or replacement, or to cover expenses while waiting for payments to be received. A business that has at least a years’ worth of experience and is able to show a history of sales and expenses is in a better position to receive a business loan then if they are just starting out.
When it comes time to apply for a loan, consider the following:
- For what purpose does the business need the loan? Lenders will want to know exactly what your plans are for the funds.
- Has the business investigated lending sources to see which ones offer the best terms?
- Are there government sources for loans, such as Small Business Administration (SBA) loans or even federal grants available?
How to get a loan?
- Research the types of loans available. A short term loan can be used to pay bills. A longer term loan may be necessary when smaller monthly payments are desired.
- Borrowers with good or average credit will be limited in their options. Those with good credit should take the time to look at all options in order to get the lowest interest rates.
- Some financial institutions may be better for borrowers based on the type of work they do. Those eligible to join a credit union may want to since they may have lower criteria for loan approval.
- Borrowers should always keep all financial records organized and have them available to transmit online or present in-person.
What is a bridge loan?
A bridge loan is used when someone is buying and selling a house at the same time. A homeowner may have a commitment to sell their existing home but need the funds from that sale to be able to purchase a new home. In order to accomplish this, they will apply for a bridge loan to provide them with the funds they need to transition through both major transactions.
How to get a student loan?
There are government and private sector sources that may be used to obtain a student loan. Private sector sources are typically banks that will treat student loan applications as they do requests for other loans. They will look into an applicant’s credit history and make a determination based on that and their ability to repay the loan.
Because it is so difficult for a young person just entering college to be able to demonstrate credit worthiness, the federal government offers several loan programs. These programs have the lowest interest rates and are typically eligible regardless of credit score. The downside to federal programs is that they usually do not cover all of the student’s expenses.
Students should check with the financial aid office at their school. They will provide the student with all of the information needed to apply for federal loans. They will also offer suggestions and resource to obtain money from other sources. This may include potential grant programs or even suggestions on where to find employment while attending school.
What is an unsubsidized loan?
The federal Department of Education offers several loan programs for students in qualified four year higher education programs. Students who are independent (their families do not contribute to their education costs) or students who have parents who are unable to receive educational loans may receive unsubsidized loans towards their education. An unsubsidized loan may be used for undergraduate or graduate programs.
What is a Jumbo loan?
A jumbo loan is often referred to as a jumbo mortgage. To understand a jumbo loan one needs to understand a conforming loan. A conforming loan is a loan that meets standards of requirements for a mortgage that are set by Fannie Mae and Freddie Mac. These two institutions are government sponsored enterprises that buy mortgages from lenders. They set guidelines for how much of a loan someone should receive based on their credit, the value of the property and the loan amount.
A jumbo loan is a loan that does not conform to the Fannie Mae and Freddie Mac standards. An example of this type of loan is when someone wants to purchase an expensive property in a market where property values are inflated. To be eligible for a jumbo loan a buyer has to have a very high credit score and also be able to place a much higher down payment on the property. These tougher standards are necessary because lenders cannot sell jumbo loans to Fannie Mae or Freddie Mac and assume all of the risk.
How to get a small business loan?
Small business owners have several options for getting a loan. They can use traditional banks and financial institutions, or they can look into options available with backing from the federal government.
One of the first steps involved in applying for a small business loan is determining what the purpose of the loan is. Is it a one-time need for business improvement or is the need ongoing, for things like managing cash flow and expenses? Next is investigating available funding sources. Which source is best will depend on whether a business is looking for a traditional term loan, a working capital loan or a loan based on receivables due to the business.
The Small Business Administration (SBA) is a valuable resource for information and possible opportunities for funding. The application process through the SBA is considerably longer than through the private sector but they may be able to provide an SBA backed loan carrying a lower interest rate.
How does a home equity loan work?
When someone makes payments on their mortgage they build up equity in their home. They are paying off the loan over a long period of time but may be eligible to take out a second mortgage on the property. This second mortgage is sometimes referred to as a home equity loan. The institution holding the mortgage on the property will let them draw from a line of credit that equals an amount at or below the equity they have in the home. One of the attractive features of a home equity loan is that the interest rates are typically less than what a credit card would charge.
What is a conventional loan?
More than 60% of all home buyers choose a conventional loan for their mortgage. Conventional loans are those that are not backed by a government entity, such as FHA. Conventional loans are available for people with higher credit scores and typically are available at lower interest rates. Depending on the down payment amount, mortgage insurance may be waived for conventional loans while government backed loans require some form of mortgage insurance.
How to get a personal loan?
Most personal loans do not require collateral to secure them. The person who receives the loan simply agrees to the terms, signs the documents, and repays the loan according to the terms. As with most other loan options, the amount of interest charged is largely determined by the credit score of the applicant. A lending institution will look at the credit score, the current wages and length of employment and the amount requested when making a decision.
Many financial institutions have online application portals for applications. Decisions are made almost immediately and the transaction can be quick, with funds deposited in the applicants account the following business day.
How to refinance a car loan?
Many people find themselves carrying a long term car loan with a high interest rate. They may find that their credit rating has improved and want to refinance the loan. Here are the steps to take when considering refinancing a car loan.
- Analyze changes in the borrower’s credit score. Has it improved since the initial loan was taken out?
- Look through documents on the current loan. What the current buyout amount is and how much will principal and interest payments change over the remainder of the current loan term?
- Comparison shop what the payments are currently and whether they will come down. It is important to note that the economy drives interest rates. The interest rate today for good credit, is may be what it was when the car was initially financed. Borrowers should always run the numbers to see if there is a benefit before assuming that a better credit score means a better rate.
- A borrower who does get better terms may want to make the same monthly payments with the refinanced loan in order to get the loan paid off faster.
What is a Stafford loan?
Loans offered by the U.S. Department of Education for those enrolled in approved higher education programs are considered to be subsidized and unsubsidized. The program that these loans fall under is referred to as Stafford Loans. Which program a student is eligible for is determined by several factors, including other sources for funding and whether they are enrolled in undergraduate or graduate programs.
How to get a car loan?
When it comes to financing, many people pick the car before they look into the financing involved in buying a car. Often times, reversing the process is better.
- How much is affordable?
- What are the financing options? Many people go to the car dealership not knowing how they are going to finance their car. They pick the car out and the dealer walks them through the process of applying with lenders that work with the dealer. Check with banks and other auto financing companies before going to the dealership. They may approve you for an amount and offer you a letter of credit that you can provide to the dealer.
What is an installment loan?
An installment loan is an all-encompassing term for any loan where someone receives an amount of money and agrees to repay it, through regular payments, over a predetermined period of time. Almost all installment loans have a monthly payment plan. Unlike a credit card, an installment loan is fixed. If additional funds are required, a borrower will have to re-apply.