MonthApril 2019

What is a Loan?

Loan

A loan is a monetary loan which is repaid in current payments over a specified period. Long-term loans usually last between one and ten years, but can last as long as 30 years in some cases. A loan usually involves a raised interest rate that will add additional balance to be repaid.

Long-term loans

Long-term loans

Long-term loans can be granted on an individual basis, but are often used for small business loans. The ability to repay over a long period of time is attractive to new or expanding businesses as the assumption is that they will increase their profits over time. Long-term loans are a good way to quickly increase capital in order to increase a company’s delivering capacity or reach. For example, some new businesses may use a loan to purchase company cars or rent more space for their activities.

Student loans – Short-term loans

Student loans - Short-term loans

Some student loans are mainly short-term loans. In the United States, Stafford Loans are often offered to college students as a means of paying tuition and living expenses. This loan is unique in several ways and can be very beneficial to the students. Part of the loan can be supported so that interest does not accrue while students remain in school. Students are also typically given a six-month grace period after graduation before you begin repayment.

One thing to consider when getting a loan is whether the interest rate is fixed or floating. A fixed interest rate means that the percentage of interests will never increase regardless of the financial market. Low interest periods are usually an excellent time to take a fixed rate loan. Liquid interest rates will fluctuate with the market, which may be good or bad for you, depending on what happens to the global and national economy. Since some loans last for 10 years, betting that rate remains constant low is a real risk.

Also, consider whether the loans you are looking at are using interest rates. If it does, the amount of interest will periodically add to the borrowed amount principle, which means that interest stays higher the longer term lasts. If the loan does not use the interest rate, check to see if there is any penalty for early repayment of the loan. If you get an unexpected or surplus rise spectacularly, you may have to pay your entire balance before it is due, preventing you from paying extra interest by waiting for the loan’s term to end.

Some lender institutions offer a wide range of repayment plans for your loans. Usually, you can choose to pay your debts even in amounts, or the amount you pay will gradually increase over the loan period. If you expect your will be more financially capable of repaying in the future, opting for a step-by-step increase can help you and you save interest. If you are unsure of your future monetary position, maybe even payments help prevent defaulting the loan if it goes bad.

Choosing a loan may be in your best interest, depending on your situation. Beware of extremely long repayment periods, which generally, the longer term, the more you will owe because interest rates have accrued over a long period. For more information, contact a financial advisor or talk to your bank about the loan options they provide.