Managing Loans
What is a "loan"?
A loan is a transaction where an individual borrows money from another individual and promised to repay it, usually with interest.
What are "principal" and "interest"?
In a loan transaction, there are two components in the repayment. Part of it is principal, which is a portion of the original amount of the loan that is given to you. The other part is interest, which is the compensation that the borrower pays to the lender for the use of the money.
What is "collateral"?
Frequently, a lender will want to be assured that they're going to be able to get paid. They may question the ability of the borrower to pay, so they'll ask for collateral. Collateral is the putting up of something of value to secure the repayment of the debt. Now, when I say secure the repayment, what that means is in the event the borrower cannot pay, then the collateral can be sold to reimburse the lender so that the lender can become whole.
What is a "home equity line"?
A useful tool that individuals can utilize to consolidate other kinds of debt, or to do home improvements is a home equity line. A home equity line is a line of credit, meaning it's an amount of money that can be withdrawn, that is based upon the value of residence that the individual lives in. Ordinarily there is a first mortgage on the property. The home equity line will usually be a second mortgage on the property.
What is a "payday loan"?
We are seeing many people who have a difficult time living paycheque to paycheque use payday loans. A payday loan is borrowing money and having it secured by your next paycheque. There are lenders who will lend you money on the promise that you will pay out of your next paycheque. Typically, the interest rates on these loans are very high, and I would recommend that individuals avoid these kinds of loans, unless they're truly in dire circumstances and it's only on a temporary basis.
When is it appropriate to apply for a loan?
Many times an individual is going to purchase something that is a high ticket item. Such as a house or a car and they can't pay for it all at once. Borrowing money to do it makes sense. However it doesn't make sense to borrow money to pay for your normal living expenses while you are employed.
Where can I get a loan?
The traditional sources for loans are financial institutions such as banks and savings and loans and credit unions.
How do I apply for a loan?
Applying for a loan can be an intimidating process. First of all there's an application. The underwriting of the loan requires you to give disclosures about your entire financial life and much of your personal life as well. You have to disclose all your assets, all of your liabilities, and provide copies of your pay stubs, and possibly copies of you bank statements and your tax returns as well.
What is a "security interest"?
Often, when you buy something on credit, the lender will perfect a security interest. A security interest is a tool that the lender utilizes to register with the Secretary of State of the state that you live in that, in the event you do not pay off the loan that you owe, there's a record that the particular item of merchandise that you purchased has a lien against it. Any future holders of that property, should the property be sold, will have to fulfill that lien before they can own it free and clear.
What is a "lien"?
A lien is a right that a lender has that is registered and put on public notice so that the lender can be assured that they will be repaid.
How should I choose a loan?
Like any other complex financial instrument, a consumer should shop for a loan. You might find that by going to your bank that you deal with on a regular basis, or even another bank that you might be able to get a loan with better terms. The loan might come with a better interest rate, the loan might have a longer repayment period. The loan might give you better options.
Are credit union loan rates always lower than bank loan rates?
Credit union rates are frequently lower than traditional banks, but it still requires comparison shopping, because you never know when there might be an incentive that's being offered by a different lender that might be better than that which you can get from a credit union.
How can I borrow money to buy a car?
You're buying a car and you've negotiated the terms, and now you're in the car dealership's finance department, and ready to sign the paperwork. Don't assume that the loan to pay for the car that's being offered to you through the in-house finance company is, necessarily, the best loan for you.
What are some loans to be wary of?
As a result of the recent runup in real estate prices, we've seen individuals borrow money on terms that may end up really hurting them. There are such things as come-on interest rates for mortgages, where for the first several months or year there's a very, very low interest rate. But then, as the interest rate adjusts to the current market, the payments can go up hundreds of dollars a month and the buyers of the home may find themselves in a situation where they can't afford to make the payments anymore and they have to end up either selling the property prematurely or maybe even losing the property to forclosure. In addition, there are some loans that are have what's called negative amardization, or the acronym in neg-am. And with negative amardization, the payment remains low, but interest continues to accrue on the loan over and above what the minimum payments are, and that interest that's unpaid actually gets added to the principal, so that every day that an individual is borrowing the money and paying off the loan, the loan balance continues to increase. And we're seeing that a lot of people who were stretched into buying homes during the recent rise in prices are having to deal with these loans now.
