How Do Loans Work?

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How Do Loans Work?
How Do Loans Work? (Image: Loan)

Your Part

To get a loan you must first know what kind of loan you need--automobile loans, a mortgage or a personal loan. You then have to fill out an application. The more money you need, the better your credit rating should be. Banks lend money based on your credit score and job history. If you have been employed at the same location for more than two years then you are good. You must also have a good history of paying your bills and credit cards on time. Banks will consider you a risk if you are known for being late at paying your bills. If you have a good job and a good credit report you will be approved.

What if you don't have a good credit rating or a good job?

It is possible to still get a loan without a good job or a good credit rating. You have two options. First, you could get a co-signer. This is a person who is willing to assume the risk of the loan if you don't pay it. Make sure you will be able to pay the loan or the other person will suffer for it. Your second option is to get a loan online with a company that is going to charge you a ridiculous amount of interest. These companies know you are desperate so they charge you obscenely large interest rates. Be careful with this option or you could be paying on it forever.

The Bank's Part

The bank is willing to loan out money because it can make money on the interest. The interest rate is the percentage of your loan amount that is charged to your loan each month. If you borrowed $100.00 then you may owe $105.00 by the second month. Usually you are not charged for the first month if you pay it in full. The third month you could owe $110.00 and so on. Each month the balance you owe increases. By the time you pay your loan off you could have paid twice the amount of the original loan. But this is how banks make their money and why they are willing to lend it out. They also make money on any late fees.

What kind of Interest Rates come with Loans?

Each type of loan comes with a different interest rate. Houses (mortgages) are typically between six and nine percent. Car loans are higher than mortgages with an average of 8 to 12 percent. Credit cards come in the highest at anywhere from 12 to 23 percent. Student loans are usually the smallest interest rates ranging from four to six percent.

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