With so much financial jargon and different options to consider, it can be difficult to understand how loans actually work. Yet when you’re armed with accurate information, loans are relatively simple to understand. This article explains the mechanics behind a loan, so you have a good idea of what to expect when you next look to borrow money.
Understanding how loans work
At its essence, a loan is an agreement between a lender and you (the borrower). You will borrow the stipulated amount and be required to pay it back in a specific period of time, with additional interest. During the application process, you will be able to see the terms and conditions of the loan, as well as details about interest and repayment. Once you’ve been approved, you will need to pay back the designated amount each month as well as the interest. This continues until you have repaid the loan amount in full.
You can apply for secured or unsecured loans. As the name suggests, a secured loan is ‘secured’ against an asset that you own. In many cases, this is your house, car, or something that is valuable enough to guarantee payment if you fail to pay the money back. Most secured loans are for higher sums and come with comparatively low-interest rates.
On the other hand, an unsecured loan allows you to borrow money without putting up an asset as a security. In other words, if you are unable to repay the loan, the lender can’t seize any of your assets.
In spite of the different terms of secured and unsecured loans, they can both be used in different ways. Some people use loans to pay for home improvement projects, debt consolidation, or a car purchase. You might even take out a loan to pay for a wedding or vacation – it really just depends on why you need the money, and you can use it for many purposes.
How does the loan application process work?
Before a lender agrees to a loan, you will need to complete the application process and satisfy the criteria. You will need to provide things like your name, address, date of birth, nationality, marital and residential status, employment status, income details, and the reason you’re applying for the loan. The lender then uses this information to decide if you’re able to pay the loan back. Most lenders will then run a credit check before making their final decision.
Koyo Loans and other lenders use Open Banking technology during the decision making process. This provides lenders with real-time, accurate financial information about borrowers, ensuring a fair decision can be made.
Credit history and loan applications
Your credit history plays a big part in whether or not you will be approved for a loan. It also affects how much interest you will be required to pay back. The stronger your credit history, the more likely a lender is to loan you the requested amount with comparatively low-interest rates. It’s a good idea to double-check your credit score before applying for a loan, and you can always work on improving it.
But credit history is not the only determinant. The advent of Open Banking technology has meant that lenders can now determine whether a borrower is eligible for a loan by using real financial information. Ultimately, this makes the process a lot fairer and based upon what is actually the case rather than what a third-party credit agency says about you.