Access to loans has become much easier in the current times, thanks to the emergence of new technology. There are a few things you need to know before taking a loan. The loan process has become more simplified and now without any paperwork or collateral, one can apply for a loan from the comfort of your own home and have it in your account in minutes. But it is important that you also understand the terms and conditions of your application process and below are some;
- Interest rate; is the amount a lender charges a borrower. It is applied to the principal, which is the amount of the loan. The interest rate is the cost of debt for the borrower and the rate of return for the lender. A borrower that is considered low risk by the lender will have a lower interest rate. A loan that is considered high risk will have a higher interest rate.
- Credit limit: is the maximum amount of credit a financial institution extends to a client. A lender examines the borrower’s credit rating, personal income, loan repayment history, and other factors when setting the credit limit. You can only borrow within your credit limit but not above it.
- Credit Score: is a representation of your creditworthiness. It is what lenders use to determine a person’s credit risk and repayment ability. When you apply for a loan, your credit score is evaluated to determine whether or not the loan will be accepted. A good credit score shows lenders that you can pay your debts on time, but a negative credit score indicates that you might have trouble returning your loan. As a result, the higher your credit, the better your chances of getting a loan.
- Tenor: is the length of time until a financial contract expires, and it can be given in years, months, or days. Short-term loans often come with more flexible loan terms and lower interest rates while long-term loans come with higher interest rates. High-tenor loans are typically seen as riskier to the lender.
- Debt-To-Income Ratio: measures the amount of income a person generates in order to service a debt. A low debt-to-income ratio demonstrates a good balance between debt and income. In other words, if your DIR ratio is 15%, that means that 15% of your monthly gross income goes to debt payments each month. A DIR of 43% is typically the highest ratio a borrower can have but lenders generally seek ratios of no more than 36%. To calculate your DIR, sum up your monthly debt payments including credit cards, loans, and mortgage, then divide your total monthly debt payment amount by your monthly gross income. The result will yield a decimal, so multiply the result by 100 to achieve your DIR percentage.
- Whatever it is please ensure to know these terms, know more details about how loan works to avoid issues with your facility.
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