The A to Z of Finance

  • 7 months   ago

Finance and credit are two inescapable facts of life. You are almost guaranteed to take out a credit-related product at some point in your life, whether it be a mortgage, buying a car or a simple cash loan

 

 

Despite this, so many consumers out there do not understand what basic finance-related terms mean or how these terms will affect them. This misunderstanding becomes an issue when the consumer applies for a loan or other credit-related product. This really becomes a problem when consumers enter into a loan contract they do not understand or are unhappy with. 

To make things a little easier, here are a few common loan features and terms you will see in most loan contracts. 

Interest 

The interest rate is usually an annual rate charged to the borrower. Interest is, essentially, what you repay the lender on top of your principal amount. This is how lenders make money and are able to stay profitable and keep lending. 

Obviously, the higher the interest rate, the more you will repay in total. Moreover, the longer your loan stays active, the more interest you will repay.  It is, therefore, important you always consider the interest rate when comparing payday loan products

Interest rates may come as both fixed and variable. As you may have already guessed, fixed interest rates stay the same and variable rates are subject to change. Both come with their own benefits and drawbacks.

Finally, most lenders will also charge additional fees on top of your interest. These may come as account opening or account keeping fees and are separate charges to interest.

Loan term

Sometimes referred to as the repayment terms. Essentially, this is how long you are given to repay your loan. 

Shorter loan terms let you settle your debt sooner and potentially pay less interest overall. Despite this, short repayment terms can often result in expensive repayments that may be hard to manage. 

On the other hand, loans with longer repayment terms may be more manageable. Your regular repayments may be lower, and you could fit them around your day-to-day life. However, longer terms will result in more overall interest paid. 

Security

Security, or collateral, is an asset used by the consumer to guarantee a loan. In simpler terms, the lender can repossess and sell this asset if the borrower cannot repay their loan. Furthermore, an asset is an item of value owned by the consumer.

Loans backed by an asset are known as secured loans. If the borrower fails to pay their loan or negotiate a resolution, the lender will repossess this asset to recover some of their losses. Attaching security to a loan product reduces the level of risk for the lender, so your chances of approval may be increased. 

Unsecured loans are, as the name suggests, not backed by an asset. If the borrower cannot repay their loan, the lender is unable to repossess any asset. This does not mean you are without recourse; lenders will often pass failed unsecured loans onto debt collectors and your credit score will take a knock. 

Guarantor

A guarantor acts in a similar way to security. Put simply, they guarantee a loan for somebody else. 

So, if a consumer fails to repay their loan, the guarantor is now legally responsible for settling the other person’s debts. 

Comparison rate

A comparison rate is a useful tool for comparing loan products from different lenders. In short, these rates factor in most of the fees and charges associated with a loan, as well as the interest rate. 

Keep in mind, comparison rates may not always factor in every possible cost. For example, if you miss a payment you may be charged a dishonour fee. 

While comparison rates make it easy to get an idea of the cost of a loan, they are not gospel. There are a number of other factors you should consider when you’re searching for a loan. 

Before you apply

Always do your research before applying for a loan product. After all, misunderstanding the terms of your contract may result in extra fees and, in the worst-cases, debt spirals or even bankruptcy. 

Check around your local area for any free financial advice. This may come in the form of a Government website, a community hotline or face-to-face advice. Obviously, however, confirm the institution you are dealing with is reputable and qualified. 

These days, there is a mountain of useful information available online. If you aren’t sure about anything, make a quick Google search and you’re sure to find the answers. Alternatively, credit providers should be able to walk you through all aspects before you approve your contract. 

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