A loan is a type of financial transaction in which money is lent to another party under specific terms and conditions. A loan can be secured by a security like a property or it can be an unsecured like a credit card. Line or revolving loans are usually paid back, borrowed, and paid off, while traditional long-term loans are virtually interest-free for a specified period. There are also hybrid forms of loans, which combine elements of both secured and unsecured loans.
In most cases, a loan is a debt obligation that must be repaid in installments. The term of a loan can range from a few weeks to many years, depending on the value of the collateral securing the loan. Typically, borrowers repay their loan principal amount plus accrued interest over time as specified on the contract. While long-term debts remain in effect after the original loan term, revolving loans may be discontinued for any number of reasons. If a borrower discontinues repayment, the lender must effectively cancel all outstanding payments.
Loans allow individuals and families to take advantage of financial opportunities that otherwise might not be available. Secured credit cards allow borrowers to build up credit and build their credit rating. These cards are an attractive way to gain access to a desired item, but repayment terms can be difficult to budget for. While these cards often carry higher interest rates than an unsecured credit card, they allow borrowers to take advantage of lower interest rates on other types of credit cards that they might not otherwise qualify for.
Loans have another benefit to offer to individuals and families who need additional cash. Payday loans allow borrowers to make small emergency purchases, allowing them to make the purchase without incurring debt in advance. This helps those with poor credit rating repair their credit prior to making larger purchases. This simple interest paid to the lender will go towards the cost of the purchase, providing a valuable lesson in budgeting for the future. Additionally, many payday lenders provide consumers free customer service, encouraging good client relationships.
Because of the potential for high interest rates, it is advisable to shop around when searching for a lender. When shopping around, borrowers should find out the difference between a service fee and a closing cost. A service fee includes the actual amount borrowed and will be due at the time of repayment. A closing cost is simply the lender’s charge for loan processing, which will be reflected in higher interest rates. Many lending institutions have multiple service fees, which means a borrower could wind up paying higher interest rates overall. By shopping around, a person can save money on their final choice.
The federal funds rate is a fixed interest rate set by the US government. When borrowing money from private lenders, the federal funds rate is often used as a guide to determine the interest rate. For example, when a borrower borrows money from a lender that charges a one percent annual interest rate, that borrower is effectively being charged three percent if they choose to borrow money from a different lender. However, if they choose to take out a federal check loan that is insured, the borrower will likely pay little to nothing in interest. If you are currently interested in finding out more about federal funds rate options, feel free to speak with any financial advisor at your local bank or credit union.