Better understand the bank loan

Better understand the bank loan

In finance, a bank loan is a sum of money that a natural or legal person borrows from another natural or legal person, in exchange for a future repayment of the total amount plus the interest charged. A bank loan can allow you to finance your project.

As a beneficiary, when you take out a loan, you also incur a debt by becoming liable to repay the principal borrowed within the agreed time frame.

Why am I telling you all this? well, just because many people complain about the amount to be repaid on the due date. But before you start, here is a premium training that will allows you to know all the secrets to succeed in the Podcast.

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🎉 What is a loan?

A loan is a contract between a lender, usually a bank or credit institution, and a borrower. The lender makes a sum of money available to the borrower, who undertakes to repay it within a certain period.

There are different types of loans depending on the use and duration of the loan. THE mortgage loan finances the acquisition of a home over a long period, generally between 15 and 25 years. The monthly payments are constant over the entire duration.

Le ready for consumption is used to purchase a good, equipment or service. Its duration is shorter, from a few months to a few years depending on the amount. The monthly payments are fixed. THE Personal loan finances a personal project over a period of time average of 5 to 10 years. The monthly payments are constant.

revolving credit, such as a credit card or line of credit, allows flexible debt within an authorized limit. The minimum repayment varies each month. Learn more about bank loans….

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🎉Things to consider about the loan banking

Before applying for a loan, you should ask yourself whether it is a good idea for you. Borrowing money is a big responsibility to take on yourself, and you need to make sure that you will be able to repay the full amount plus interest or any other financial charges.

If for any reason you fail to repay the loan, you may incur penalties, which is deplorable. These penalties can range from higher interest rates to having your assets reclaimed and bad criminal records. In fact, before applying for any type of loan, you need to assess your income.

If you are an employee, you must submit your pay slips and possibly a salary letter from his employer. However, if you are self-employed, all you need to do is provide proof of your income for the last two years or more and invoices if applicable.

In order to avoid reaching this stage of penalties, you must ensure that you are able to make the necessary repayments each month on the exact due date and at the latest.

You should know that an individual's debt data is an essential part of getting an accurate financial report. Too much debt appearing on your reports will certainly ruin the creditworthiness of a business or an individual for a few years.

🎉 Types of bank loans

There are several types of bank loans. Each type of loan will have different terms and benefits, so you will need to compare them respectively to decide which one is best suited to you and your needs.

✔️ personal loans 

Mostly all banks offer personal loans whether they are personal loans guaranteed or not. Unsecured personal loans mean you don't put up collateral like a house or car if you default on your loan.

Since unsecured personal loans don't require collateral, lenders typically look to your credit reports and credit scores to help determine if you're a good candidate for a loan.

In general, people with ratings of higher credit will be eligible for better loan conditions. You may qualify for an unsecured personal loan even if your credit is fair or bad. But you may want to shop around to make sure the interest rate and monthly payment are affordable for your budget.

If, on the other hand, you apply for a secured personal loan, you will need to offer some type of guarantee, such as a car or a certificate of deposit, to “secure” your loan. Secured personal loans often come with lower interest rates than unsecured personal loans.

The advantage of personal loans is that you can spend that money however you want. This personal loan amount can be used to go on vacation or buy a new smartphone.

✔️ student loans

This is a great option to help students. Most common loans in this category have very reasonable interest rates. As a full-time student, you do not have to repay these loans immediately. However, the same needs to be repaid once you complete your studies and start working.

The amount of the loan depends on the needs of the student, the duration of his studies and his possibilities of repayment once he has entered working life. The borrower is not required to justify its use of the sums borrowed.

They can also be used to finance studies, to cover everyday expenses (rent, deposit, transport, etc.) and to finance the acquisition of capital goods.

Some banks also offer progressive release, meaning funds can be released a little each year, instead of being made available all at once. This formula is interesting because the funds are paid in accordance with the student's real needs.

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✔️ Mortgages

A mortgage is a loan – granted by a mortgage lender or bank – which allows an individual to purchase a house or property. Although it is possible to take out loans to cover the entire cost of a home, it is more common to obtain a loan for about 80% of the value of the house.

Bank loan

The loan must be repaid over time. The purchased house serves as collateral for the money loaned to a person to buy the house. These are the largest loans ever obtained.

When you are planning to buy your first home or real estate, this loan is the right option. Mortgages are guaranteed by the entity you are purchasing from.

✔️ car loans 

A car loan is nothing but an amount that you, as a consumer, borrow from banks or financial institutions in order to fulfill your dream of buying a car.

The car loan is a consumer loan, it is offered to a person (or a company) who wishes to buy a new or used vehicle. Not having the amount required for such a purchase, this person needs money and turns to a credit agency for help.

This bank pays the seller instead of the buyer and in exchange the latter reimburses the amount due each month in the form of a monthly payment. In return, you pay the approved loan amount at a specified interest rate.

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Full payment to the car dealership is made by the bank and you, as the consumer, continue to pay the bank over a period of time with applicable interest and fees. Here is an article that speaks to you clearly about car loans.

✔️ payday loans

Payday loans are loans to short term and high cost which are usually due on your next payday. States regulate payday lenders differently, meaning your available loan amount, loan fees and the time you have to repay may vary depending on where you live. And some states ban payday loans altogether.

To repay the loan, you will usually need to write a post-dated check or authorize the lender to automatically withdraw the amount you borrowed, plus any interest or fees, from your bank account. Payday loans have high fees that can amount to annual percentage rates that can get to 400%.

Getting a payday loan can be helpful if you're in a tough spot and don't have savings or don't have access to cheaper forms of credit. I recommend this article to better understand the particularities of payday loans.

✔️ home equity loans

A home equity loan is a type of secured loan where your home is used as collateral. The amount you can borrow depends on the equity in your home. It is also based on the difference between the market value of your home and the amount you owe on your home.

You generally can't borrow more than 85% of the equity in your home. Since you're using your home as collateral, your interest rate with a home equity loan may be lower than with an unsecured personal loan.

You can use your home equity loan for a variety of purposes, from home improvements to medical bills.

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✔️ Credit card loans

When using a credit card, you should understand that you will be required to refund any purchases you make at the end of the billing cycle. Credit cards are accepted almost everywhere, even when traveling abroad. As one of the most convenient ways to pay your bills, it has become a popular type of loan.

To apply for and qualify for a credit card, all you have to do is complete a simple application form provided by the card issuer. You can also choose to apply for a credit card online. These plastic cards offer great rewards and benefits. This is the loan for which you must repay on time, it's the bank overdraft.

Obviously, there are pitfalls associated with this type of loan. You must understand that there is a high amount of interest on the amounts you borrow on your credit card. If you don't pay your bills on time, interest will continue to accrue. You may find it difficult to manage your finances with the increase in the outstanding balance.

But if you use a credit card wisely and clear all your debts on time, it can definitely prove it to your best friend in your pocket. I invite you to read this article to know how to reduce bank charges.

✔️ Small business loans

Small business loans are loans given to small and medium-sized businesses to meet various business requirements. These loans can be used for various purposes which help in the growth of the business.

Some of them could include the purchase of equipment, the purchase of inventory, the payment of employee salaries, marketing expenses, etc.

The eligibility criteria for small business loans vary from lender to lender. The most common are the age of the business owner, the number of years the business has been in business, tax returns, and the statement of sales for the previous year that has been verified by a Chartered Accountant (CA).

✔️ home improvement loans

Most lenders offer home innovation loans. These can be used to cover expenses related to renovations, repairs or improvements to an existing residential property.

Depending on the lender, there's a lot of flexibility in what you can do with a home improvement loan. You can use it to buy products or pay for services.

For example, you can use it to pay for the services of a contractor, architect or interior designer. You can also use it to purchase furniture, home appliances such as refrigerator, etc. It can also be used for painting, carpentry or masonry work.

✔️ Agricultural loans

Agricultural loans are loans given to farmers to cover the expenses of their day-to-day or general farming needs. These loans can be short or long term. They can be used to increase working capital for crops or to buy farm equipment.

✔️ Loans for two-wheeled vehicles

The two-wheeled vehicle is quite essential in today's world. Whether for a long journey or a busy road in a city – bicycles and scooters help you get around easily.

A loan for a two-wheeled vehicle is easy to apply for. This amount that you borrow under this type of loan helps you buy a two-wheeled vehicle. But if you don't pay the installments on time and clear your debt, the insurer will take your two-wheeler to recover the loan amount.

✔️ gold loans

A gold loan can be used to raise liquidity, to meet emergency or anticipated financial needs. It can help in business expansion, education, medical emergencies, agricultural expenses, etc.

Loan against gold is a secured loan where gold is placed as collateral for a loan amount corresponding to its market value on the day the gold was pledged.

✔️ Sustainable consumer loans

Consumer durable loans are loans that are used to finance the purchase of durable consumer goods such as electronic gadgets and home appliances. Depending on the lender, they can be used to buy anything from cell phones to televisions.

✔️ Mutual fund and stock loans

Some lenders make loans against the value of your mutual fund and the value of your stock. However, you will not be able to borrow huge sums under this type of loans.

🎉Short term loan

A short-term loan, also called short-term credit, refers to a loan taken out over a maximum period of 2 years. The most common short-term loans are:

🎯 Consumer credit

It makes it possible to finance the purchase of a consumer good (car, household appliances, furniture, etc.) or services, over a period generally between 6 months and 2 years. The amount is a few thousand euros.

🎯 Revolving credit

It is a reserve of money, in the form of a credit card or line of credit, which can be used flexibly within the limit of a ceiling. Its duration is generally 2 years renewable.

🎯 Bank overdraft

It is a temporary overrun, from a few days to a few months, of the balance of the bank account authorized by the bank.

Short-term loans are thus used to cover immediate but transient financing needs, without committing to the very long term. Interest rates are higher to compensate for the short term.

🎯 Advantages and disadvantages of a short term loan

BenefitsDrawbacks
✔️ Short duration adapted to immediate needs (6 to 24 months)✔️ High cost with high interest rates (often over 5%)
✔️ Amounts available from a few hundred to a few thousand euros✔️ Fast and binding repayment over a few years
✔️ Obtained quickly in just a few days✔️ Risk of frequent renewal and debt spiral
✔️ Conditions generally more flexible than the long term✔️ Not suitable for financing important life projects (main residence, etc.)
✔️ Convenient temporary solution in case of urgent cash need✔️ Does not constitute a personal contribution for other credits (real estate, etc.)
✔️ Allows you to deal with an unforeseen event or a drop in income✔️ Resale of the property impossible before full refund

The interest of the short term lies in rapid accessibility. But the high cost and associated risks require vigilance.

🎉 The long-term loan

Long-term loans are types of loans that have a longer repayment term, usually more than five years. They are often used for major projects such as buying a house, buying a car or financing a business project.

One of the advantages of long-term loans is that monthly payments can be lower, because the duration of the loan is longer. This can be especially useful for large expenses that require large amounts of money.

In addition, interest rates for long-term loans can be fixed or variable. Fixed interest rates ensure that the interest rate will not change over the term of the loan, providing greater financial stability for borrowers.

However, long-term loans also have drawbacks. First of all, interest costs may be higher over the life of the loan, which means you will pay more interest on the loan.

🎯 Advantages and disadvantages of a long-term loan

Here is a more detailed version of the comparative table of the advantages and disadvantages of long-term loans:

BenefitsDrawbacks
✔️ Significant repayment period of 5 to 25 years, up to 30 years for real estate✔️ Binding commitment to repay for many years
✔️ Amounts and the greaters from a few tens to several hundreds of thousands of euros✔️ Conditions generally stricter than the short term
✔️ Lower interest rates than short-term credit, around 2%✔️ Longer lead times, 1 to 6 months
✔️ Suitable for financing large projects: main residence, studies...✔️ Total cost plus accrued interest over the entire term
✔️ Constitutes a personal contribution for other credits, in particular real estate✔️ Complex and costly prepayment
✔️ Allows you to preserve and amortize the financed property✔️ Risk of debt that is too heavy and difficult to bear
✔️ Facilitated transmission of the constituted heritage✔️ Resale impossible before full refund

The long-term benefit lies in high amounts and low rates. But the resulting indebtedness requires vigilance.

🎉 When to favor one or the other?

Short-term loans are generally preferable to long-term loans in certain situations.

For example, if you need quick financing for an unexpected expense or if you are sure you can repay the loan in a shorter time, a short-term loan may be more appropriate.

In addition, short-term loans are often used for smaller expenses. In these cases, a long-term loan may not not be justified because the interest costs over the life of the loan could be higher than the costs of the expense itself.

Finally, short-term loans may be more appropriate for people with weaker credit histories or limited ability to repay. Lenders can be more willing to approve a loan short-term because they are less risky than long-term loans.

CriteriaShort termLong term
Duration2   Loans over a short period5 to 25 year-olds  Up to 30 years for a mortgage
amountsA few hundred to thousands of € Covers limited needsTens of thousands to several million € Finances large-scale projects
Interest rateHigh rates, often > 5%  High cost of creditLower rates, 2 to 5%  Cost of credit plus content
UsageTemporary needs Cash flow, contingencies…Important projects Main residence, studies…
Conditions for obtainingFlexible granting conditions More accessibleStrict granting conditions Guarantees required
Lead timesA few days Very quick response1 to 6 months  Folder complex to assemble
PrepaymentSimple operation Possible with compensationComplex and costly operation Dissuasive penalties

This more detailed table makes it easier to understand the nuances between the short and the long term for each criterion.

🎉 Conclusion

In conclusion, this article has deepened our understanding of bank loans and its importance in carrying out personal and professional projects. We explored the different stages of the loan application process, from preparing a solid application to negotiating terms with the bank.

We also emphasized the importance of presenting a compelling business plan, researching the right financial institutions, and preparing for meetings with bank representatives. Additionally, we addressed the issue of alternatives in the event of loan denial, encouraging readers to explore other available financing options.

It is essential to understand that obtaining a bank loan can be a complex and demanding process, but by following best practices and being well prepared, it is possible to maximize your chances of success.

🎉FAQ

What is a short term loan?

A short-term loan is a type of loan that must be repaid in a shorter period, less than five years.

What is a long term loan?

A long-term loan is a type of loan that has a longer repayment term, greater than five years.

What are the differences between short-term and long-term loans?

The main differences between short-term and long-term loans are the repayment term and the interest rates.

Short-term loans have a longer repayment term shorter and lower interest rates. Long-term loans have a repayment term longer and higher interest rates.

When should I choose a short term loan?

Short-term loans are generally best for smaller expenses. They may also be more appropriate for people with weaker credit histories.

When should I choose a long-term loan?

Long-term loans are generally preferable for large projects such as buying a house or financing a business project.

They may also offer lower monthly payments but have higher interest costs over the life of the loan.

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