A loan is a lending process that transfers money from one lender to another, in return for payment of the loan principal amount plus interest over a specified period. A loan can be secured by collateral like a mortgage or it can be non-secured like a credit card. Closed-end lines or revolving loans can be paid, repaid, and borrowed again, while open lines are prepaid, variable-rate loans that change with the base rate. A borrower can borrow money either under a fixed rate loan term or a variable-rate line. For some borrowers, both kinds of loans are available.
The loan process begins with a request for funds from a borrower and is completed when a loan applicant provides sufficient proof of his or her ability to repay the loan. In most cases, a cosigner or third party is required to co-sign on the loan agreement. With a secured loan, borrowers must be at least 18 years old, have a fixed salary, and have an active checking account in good standing.
Unsecured loans, on the other hand, are available to any adult with a legal age who has a valid, verifiable income and capable of proving his or her income and financial history. Both parties need to have a regular job with a regular paycheck. Borrowers who have bad or no credit may also qualify for a loan but the interest rates are usually higher than those of secured loans. The application process involves filling out loan application forms, providing proof of employment, income information and monthly expenses and then signing documents related to the loan agreement.
To assure the authenticity of the documents the borrower should always sign a government-issued key. The Internal Revenue Code gives the borrower the option of selecting which federal tax liabilities he wishes to include. For instance, if the borrower wants to include state income tax, he can indicate that in the interest of time, he will file the state income tax. Another option available to the borrower is to indicate sources of income other than the paycheck. Examples are bonuses or commissions from professional associations.
Private lenders must use caution while providing loans to borrowers with bad credit. Since these lenders are not insured by the FDIC, they are responsible for any defaults on the loans. This makes the private loan for a high-risk transaction.
If a borrower defaults on the loan, the lending institution must sell the assets it holds to meet the debt. Lenders must be aware that something is owed to them even if the loan has been repaid. Banks are in a better position because they have the ability to write off part of a loan as an interest loan. The bank is not, however, able to write off all of the loan. Private lenders cannot be sure that their assets will still be available when the defaulted loan is repaid.
Borrowers should choose their loan carefully. If they do not have something to offer as collateral, a loan may not be the best choice. A higher monthly payment, with a longer repayment schedule, is usually better. However, if a loan requires the borrower to have something to offer as collateral, then this should be considered a very risky loan and only be undertaken by persons who are sure they can repay the loan. This should only be undertaken by persons who have full faith in their ability to repay the loan and are in some way secure about the possibility of losing the collateral.
A third type of unsecured loan that may not be suitable for those who are unable to pledge collateral is a signature loan. A signature loan is a loan that is made under the promise to repay to a third party. In most cases, if the principal repayment amount is not repaid on time, the third party may sue the borrower for failure to repay. An unsecured loan can provide quick cash to the borrower in an emergency, but care should be taken when relying on a signature loan because there is no security or assurance of repayment. Signature loans are generally not advisable as they are not backed by any collateral.