Being able to get a loan is an important part of finances. Loans allow people to make the major purchases in life that would otherwise take years or decades to save up for fully. Loans are quite simply a crucial part of the financial landscape.
Despite that, many people aren’t sure quite how loans work. They understand the concept that they can receive a large sum of money, and then pay it off a bit at a time. However, they tend to quickly learn that there’s a lot more to a loan than that. People who understand loans use them as a way to ensure their financial security. People who don’t properly understand them use them as a way to get into a mountain of debt and head toward bankruptcy. Take this opportunity to learn more about the basics of loans and the loan process.
The Difference Between Pre-Approval and Pre-Qualification
These two terms can be thrown around a fair bit and seem like they are interchangable. Credit card companies don’t make it easier, using them for their own advertising as they send people offers for extra credit cards. However, they actually mean very different things.
These terms are best used when it comes to home loans. Pre-Qualifying is actually the first step in a loan approval process. You submit your financial information and simply through that, the bank can provide an estimate of how much you’ll be able to borrow. If you’re submitting to a bank or institution where you already have accounts, then they’ll have some additional data they use. In some cases, being a customer, they can make a pre-qualifying estimate without much user submitted data at all.
The second step is pre-approval. This step is more of a definitieve one. Pre approval comes with the loan application and credit checks on a full financial background. This can also provide better ideas of what kind of interest will be required on the loan. The pre-approval process is sort of a misnomer. It’s really an approval and offer of a loan. However, for most people, you need to get this pre-approval before purchasing the home or vehicle you’re intending to get.
The Loan Process
The first step to getting a loan is determining your needs. Figure out how much money you’re likely to need. You don’t want to go through the process multiple times, but also don’t want to take so much money that repayment is difficult. From there, determine your credit score and check the requirements of a lender. You don’t want to apply for a loan you will immediately be rejected for. After that, you will need to gather required personal documents as outlined by the lender.
From there, you apply for the loan and for pre-approval as noted above. You don’t have to take a pre-approval offer. You can make the same request at multiple locations to ensure that you’re getting the best offer in terms of interest and repayment terms. From there, you’ll receive the money from the loan chosen and simply need to repay it according to the terms included.
Common Types of Loans
There can be a wide variety of reasons to get a loan. Banks and financial institutions have made sure there are loans for every situation. Many popular loans include:
- Home Loans – Buying a home is impossible for most people without a loan. Paying off your mortgage can take 20-30 years. However, it’s a great feeling when that last payment is sent in.
- Car Loans – Car loans can come from banks and financial institutions, or from the car company themselves. In those cases, they are referred to as “financing”. The financing group giving the loan can be from the car company direct or a third party that they use for financial purposes. Many car loans allow potential members to prequalify. This is especially true if it’s from a bank where a mortgage is already in place.
- Home Improvement Loans – Many people may choose to take out a loan to pay for home improvements. Loan qualification for these loans is easier if you own your home fully. Home improvement will usually provide more value in the price of your home than the cost of a loan, so they can make a lot of sense.
- Debt Consolidation – This is a common type of loan which allows someone to combine their debt into a single entity and pay it off with a lower interest rate. This allows the debt to be paid off much quicker than it would otherwise.