Your In-depth Guide to Banking Loans

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If you’re like most people in the United States, there comes a time where you need to finance something. This could come in the form of a car, a home, a phone, or even a business. Recent advances in technology have moved a lot of the financing industry online – but when it comes down to it, many people like dealing with a traditional brick-and-mortar bank. This isn’t to say that you can’t attain a bank loan online, but a bank loan is a common term for a loan that is extended by a large, trusted commercial lender.

If you do decide you want to get a bank loan, you have plenty of options. Commercial lenders will provide you with all the information that you need to have a full and deep understanding of this traditional form of finance. People in the United States have been getting bank loans for hundreds of years – in its present form it is a well-regulated industry with a significantly positive reputation from those who use it responsibly.

How Do Bank Loans Work?

So, you may be wondering — what is a bank loan? Bank loans are individual loans that are given by commercial lenders. For example, you want to buy a car but you don’t want to pay for the entire vehicle upfront. You can go to a bank and ask them for an auto loan (a bank loan for a vehicle). If you’ve been approved for the loan, the bank will then transfer you the amount of money it takes to purchase the vehicle. You will then need to pay the bank back the money that you have borrowed at the interest rate that you have agreed to. The three major components of a bank loan include:

  • Term Time – The amount of time that the loan is paid back over. For example, if your term time is three years, you will most likely make one payment a month for three years.
  • Interest Rate – The rate at which the bank is lending you money – you will be responsible for paying this rate annually on the money that you borrow, although it will be divided up between payments.
  • Principal Amount – This is the amount that you have agreed to borrow from the bank. This is what you are responsible for paying back, with interest.

Most lenders will provide you with loans with no bank account at their bank – they care more about your credit score. Understanding the basic components of a bank loan will help you navigate the industry a lot better. As with any financial decision, you should ensure you are well versed in the terminology and process prior to applying for any form of finance. Being ignorant of the basics is the best way to end up in a financial agreement you are incapable of fulfilling.

Popular Bank Loans

There are plenty of different reasons that individuals apply for bank loans. But there are a few different bank loans that have become so popular that they’ve been specifically designed for certain purchases. If you go into a bank, they will most likely have a range of loans that can be used for different purchases. Interest rates and term times will be dictated by the type of purchase you are making. We will overview some of the most popular forms of bank loans below:

Home Loan (Mortgage)

This is one of the most popular forms of bank loan on the market. Because purchasing a home in modern-day America is so expensive, not many people can do it without a mortgage. In fact, even people who can afford to pay for a home upfront often get a mortgage because of the associated tax benefits.

Investing in property is risky, as changes in interest rates and property values can result in people defaulting on their loans. For this reason, mortgages are secured against the value of the home. This means that if you are to default on the loan, the bank will repossess your home and then sell it to recuperate the amount of money they are owed. In addition, most home loans will stipulate that you have to put down a considerable down payment – often around 20% of the home’s value. You should begin saving now if you plan on getting a mortgage in the near future.

Auto Loan

This is another popular form of bank loan that many individuals in the United States receive from lenders. Like with homes, many people don’t pay for their cars upfront – especially if they’re new. Banks will provide their clients with the ability to purchase cars using auto loans. The majority of these loans also include the right of ownership to the vehicle – this means if you don’t pay your auto loan, the bank will come and repossess your vehicle. A US bank car loan is one of the most affordable auto financing agreements in the world – we benefit from having extremely low financing when it comes to purchasing vehicles. In addition, many dealerships will offer their clients the ability to in-house finance their vehicles. Make sure to compare their rates with the rates of your local commercial lender before agreeing to anything – they can often be higher. A bank rate auto loan is traditionally the cheapest form of auto loan available. If you’re wondering how to get a bank loan for a car, there are plenty of online lenders that can help provide you with assistance.

Education

They say that one of the best investments you can make is in your education, and this is often the case. But bank loans for university educations have become big business in the United States. There is even such thing as a student loans bank – a bank that only deals with student loans. This is another one of the most popular forms of bank loans that many young individuals take out. Unlike mortgages and auto loans, school loans don’t have anything that they are tied to (for the most part). This makes them a particularly risky form of debt for lenders to provide – hence, school loans often have very high interest rates. This is why individuals should think hard about how much money they should borrow for school and consider whether or not they will be able to make enough money to pay it back.

Bank Loans for Other Items

When people discuss bank loans, they often refer to larger loans such as mortgages or auto loans. But what many individuals don’t realize is that you can actually get a traditional bank loan for a variety of small purchases. This can be particularly advantageous depending on the type of item you are buying. For example, you may be considering purchasing a new smart phone through your mobile phone provider. They may offer no interest financing over two years, but this will be under the condition that you sign up to a premium plan of theirs for two years as well. If you were to go and get a bank loan, you may be able to get a low interest rate that won’t cost you much money to purchase the phone. You then won’t risk being signed up into a long-term contract with a mobile provider – often these contracts have expensive buy out clauses that make it near to impossible to end the contract if you need to change providers or move out of the country.

There are also some reasons that you should normally steer clear of a bank loan. Many Americans will use bank loans for various things such as holidays or unnecessary expenses. This can lead to problems, as the debt may be secured against your home or another asset – you should try and avoid getting bank loans for purchases that don’t add inherent value to your life.

Current Interest Rates: Why They’re Important

Although interest rates are always a key topic of conversation when it comes to bank loans, many people neglect to discuss the importance of interest rate fluctuations. Interest rates change regularly based on a series of factors – this is quite a complex topic and won’t be discussed in depth. But the point is that you should be aware of the current interest rate environment and make decisions based off of it.

Often, interest rates can be next to nothing, which means financing small things can be a good decision – you can use the money you have now to invest in other things. But if interest rates are much higher, you may decide that it is not a good time to be using forms of finance. That’s why It’s important to constantly have your finger on the pulse of the market. Something may make sense to get a bank loan for one day, but next year it may be a bad decision. In addition, banks that give personal loans with bad credit traditionally offer higher interest rates.

It is also important to note that many bank loans have variable interest rates. Many people assume that the interest rate that they sign for is fixed – this is sometimes the case, but often untrue. For example, if you sign a mortgage agreement at a 4% interest rate, but interest rates climb, you may end up being liable for a much bigger payment. That’s why it’s important to understand you should leave room in your budget for interest rate fluctuations. Fixed interest rates are much more common with shorter term loans, as the bank doesn’t have to assume as much risk with the loan they provide you.

Bank Loan Calculators

One of the most positive things that the internet has brought to the world of finance is clearer explanations for borrowers. There are a range of tools that you can find online to help you better understand various forms of finance and how it may be of help to you or your family. One of the most popular tools currently on the internet is finance calculators – or in the case of this article, bank loan calculators.

A bank loan calculator is a really cool digital platform that allows you to get a better understanding of a loan that you might want to take out. You input different variables such as principal amount, term time, and interest rate and the calculator will output different figures to help you get a better understanding of how good of a deal you’re getting. This is especially true for people who are attempting to get quotes from various lenders. Your term times might differ, or your interest rates may be slightly different, in which case it can be hard to predict the amount of money you will owe after the maturity of the loan. Using a calculator is one of the best ways to be a smart borrower.

You can head online and find various calculators to choose from. Some of these will be provided by online calculator companies, whom provide a range of different calculators. Others will be provided directly by lenders; many large commercial lenders provide calculators on their websites to help prospective clients get a better idea of whether a loan is viable for their situation.

 

Advantages of Bank Loans

At this stage, you probably know a lot about bank loans and whether they are a good source of financing for you. But having a full break down of the advantages of a bank loan is a better way to get a clear understanding of the benefits associated with this form of loan:

  • Flexible Terms – This isn’t to say that banks will give you flexibility with all terms, but because different bank loans are structured in different ways, it allows for you to receive loans for different term times depending on the asset you’re purchasing (i.e. mortgages have longer terms than car loans)
  • Low Interest – Because bank loans are often secured against an asset, and are paid back over a set term, they tend to be at much lower interest rates than many other forms of finance.
  • Thousands of Lenders – With bank loans, you literally have thousands of different lenders you can choose from.

 

Disadvantages of Bank Loans

  • Often Secured – Depending on the type of loan you get, bank loans can sometimes be secured, which means that you could face losing an asset if you default on the payment.
  • Tied to Personal Credit Score – In addition to sometimes being secured, bank loans are tied to your personal credit score which means that if you miss a payment, or default on the loan, your credit score will be damaged for the foreseeable future.

 

Alternative Forms of Finance to Bank Loans

If you decide to apply for a bank loan, there is a high chance that you will be offered alternative forms of finance by your lender. It’s important that you have a general understanding of these forms of finance so that you don’t make the wrong decision on which is the best option for you.

One of the most popular finance instruments a bank may offer you is a credit card. Credit cards are one of the most used financial products on earth – they are extremely popular in the United States. The advantage of a credit card is that it has a predetermined limit from which you can spend – you then pay off this limit at your own pace (although there will be a minimum monthly payment) and there is no term. Once you pay back part of your limit, you can reuse this credit again. The only problem with credit cards is that they have an extremely high interest rate, this is because of the lack of term time, as well as the fact that the card is not secured against anything.

Another popular form of finance that you may be offered is a credit line. Credit lines are similar to credit cards in that you only pay interest on what you borrow, and you can reuse the credit as soon as you’ve paid it off. Like credit cards, they have very high interest rates when compared to most loans. The one advantage of using a personal credit line is that you have access to cash from which you can withdraw. Many credit cards charge extremely high interest rates and cash advance charges if you want to withdraw cash from your card.

Tips and Tricks

First, always provide yourself with a lot of time before deciding on whether a bank loan or other form of finance is right for you. One of the biggest mistakes that borrowers make is rushing into judgement – you don’t want to make a rash decision that ends up costing you money in the long run. In addition, you want to have the ability to have time to compare and contrast multiple offers from different lenders. The last thing you want to do is sign the first loan agreement you’re offered at an inflated price purely because you needed the money quickly. Always plan ahead.

Secondly, make sure to ask your lender plenty of questions if there is anything that you’re unsure about. Many borrowers think that they know the ins-and-outs of the loans they are receiving, but then they end up with nasty surprises when they realize they are responsible for paying hidden fees and charges they were initially unaware of. Also, ask your lender for a full break down of the costs and fees within the loan you are receiving – you should also ask for a total cost analysis. This is the best way to understand the total amount of money that you will be paying over the life of the loan. The best way to compare loans is to compare their total costs, not their interest rates or terms.

Lastly, always use consumer watchdog groups to look up reviews of the lender that you are going with. If you don’t have someone to refer you to a lender, then you need to make sure that you use the internet to cross reference if they are an ethical company. Many people are sucked in by the promise of low rates and additional benefits, only to find out there is poor customer services and hidden fees. You may be thinking to yourself it doesn’t matter if your lender has good customer service or not, but this is not the case. Using a bad lender can lead to a horrible and detrimental experience. If you don’t believe us, just check the reviews of some bad lenders online – past customer stories speak for themselves.

Verdict

After reading this guide, you should have a firm understanding of the bank loan industry and how it may be able to benefit you. Bank loans have been one of the most popular forms of finance in the United States for hundreds of years for a good reason – they’re a great financial product when used correctly. Like any financial decision, you should weigh up the pros and cons before making any major commitment. Never sign a loan agreement that you don’t believe you will be able to honor – the burden of defaulting on debt is not something that you want to experience.

Consider all finance product before deciding on a specific loan to take out – different situations require different solutions. Also, if you’re thinking of opening up a business, don’t apply for a personal bank loan. Using a personal bank loan is a bad idea for starting a business because it ties the responsibility of the loan directly to yourself. For example, most business bank loans do not impact your personal credit score, whereas a personal bank loan does.

Before you apply for a bank loan, you should make sure to have your credit score as high as possible. This is important for two reasons. Firstly, it will dictate whether you are eligible for the loan in the first place. Secondly, it will dictate the interest rate that you are offered by your lender. The interest rates available to you will fluctuate significantly based on your credit score, so don’t take it lightly. Having a healthy score will save you significant money going forward if you apply for more finance. Most importantly, be an aware and smart borrower – if something doesn’t feel right, it probably isn’t.