If you've been looking for credit, you must have come across the term "loan," which is also commonly known as "financing." The two terms are interchangeable in the world of bank loans. However, people are often still confused about loans and what it means.
In this article, we will look at loans from a financial perspective and answer any questions you may have about the concept. Besides this, we will also talk about the different types of lenders.
Now, without much ado, let's get started and see what lenders are:
How do lenders calculate the interest rate, and what are their types of financial services?
In some cases, the interest rate is fixed while in others, the interest rate depends on the applicant.
Lenders study different factors when issuing loans. These include:
- Credit history: they analyze the credit history of an applicant to assess the risk of the investment. It also gives them information on the debt ratio.
- Credit Score: This triple-digit number is one of the most important factors that lenders consider when reviewing loan applications. If you have a bad credit rating, you will have to face a high-interest rate.
- Earning potential - This factor helps lenders decide how likely you are to pay back. For example, if you don't have a job, your loan application may be rejected because you are less likely to make payments on time. In the same way, they will easily approve you a loan of $ 1,000 if you earn $ 3,000 or more monthly.
- Type of entity: Although there are different opinions, most people believe that lenders charge companies a higher interest rate than they charge people. This is because the level of risk involved in issuing a loan to a business is higher than the level of risk involved in issuing a loan to an individual.
Apart from this, other factors such as loan amount, loan type, and repayment period can also be considered.
Types of Lenders
Technically speaking, anyone who lends you money is a lender. However, that term is no longer used for traditional lenders.
Even so, and for you to understand it better, we are going to review some of the types of lenders:
- Self-Borrowing - Don't be surprised because you have the option of lending yourself. In fact, some people think that it can be a very creative way to earn money. A good example is lending money to your own business. This way you will get profit or interest on this money.
- The loan from friends and family: You can take a loan from your friends or family, but don't forget to use the services of a lawyer so that everything is in writing. Financial affairs can lead to fights and arguments between friends and family. The best way to avoid these situations is by showing transparency.
- Crowdfunding - This is a new but popular way to generate funds and does not always include interest payments. However, the borrower must offer some kind of reward to the lender.
- Loans between individuals: it involves the loan of money between people and can even be done online since many individuals are willing to offer loans to earn interest.
- Banks: When we think of loans, we generally think of banks. They are the largest lenders, trading in the millions, but getting approved for a loan from a bank can be tricky. Also, it involves a lot of paperwork.
- Financial and other institutions: Institutions such as government organizations and even some NGOs offer loans to people in need. The terms of these loans are less strict and are generally easier to apply for.
- Online Agencies: Online agencies offer a wide variety of loans, including payday loans. These companies often work with people who cannot obtain loans from other sources, but they can be very expensive.
- Credit Unions: Most people turn to credit unions when they have a bad credit rating or cannot get a loan from other sources.
Who can be a lender?
In theory and as long as you have the money to loan, anyone can be a lender. However, donations or gifts do not qualify as loans as there is no promise that the borrowed amount will be repaid.
This concept becomes clear in the next section of this article, where we have highlighted the various types of lenders.