Loan Terms and Types of Loans: What to Know Before You Borrow

How do you shop for a loan that best meets your needs? In this article, we’ll explore different types of loans, the factors that affect how much you’ll repay over time, and how to find the loan that’s right for you.
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  • Loan Terms and Types of Loans: What To Know Before You Borrow
  • Your car just died, and you need to buy a new one so you can get to work.
  • You’ve outgrown your home, and it’s time to start looking for one with more space.
  • Your child is ready to go to college, but your savings, scholarships and other aid doesn’t cover the full cost.
  • Summer’s finally here, and you’ve decided that this is the year you’re going to spend it on a lake, in your own boat.

Most people encountering situations like these don’t have enough money saved up to pay for a new car, house, college education, or boat. The answer, often, is a loan.

But how do you shop for one, and what are some of the things you should pay attention to when you’re trying to find the loan that best meets your needs? In this article, we’ll explore different types of loans, the factors that affect how much you’ll repay over time, and how to find the loan that’s right for you.

Types of Loans

Most consumer loans are installment loans: After approval from your lender, you’ll receive a lump sum of money. Then, you’ll repay a fixed amount every month for a set period of time.

Mortgages are installment loans. So are car loans, educational loans and other loans.

You could also seek a line of credit when you need extra money. Under these types of loans, also known as revolving loans, you can borrow up to a certain amount of money—your credit limit. As you repay your balance, you can withdraw more.

Credit cards are types of loans like this. So are home equity lines of credit, which allow you to tap the value of your home for cash. (If your home is worth $100,000, and you owe a bank $10,000, you have $90,000 in equity to borrow against.)

We’ll focus on installment loans in this article.

Loan Terms

In this case, “term” refers to the length of time you’ll spend paying back your loan. Loans come in short-term, medium-term and long-term varieties: While some loans have terms of a year or less, others might have repayment schedules lasting decades.

A short-term (or personal) loan could come in handy if you have an immediate expense that you know you’ll be able to repay quickly. Often, short-term loans are unsecured, meaning you don’t have to put up collateral against them. If approved, you might get your funds the same day you apply.

Most people, though, need a longer repayment period for their loans. Car loans, for instance, typically have terms of three to seven years. Mortgages might have terms of 15 or even 30 years.

These longer-term loans often come with more rigorous background checks, and require borrowers to put up property, known as collateral, in case of default. While monthly repayment terms may be lower than short-term loans, your interest rate will likely be higher. As a result, your overall cost of securing the loan may be more. (Later in this article, we’ll show you how interest rates and payback periods affect your bottom line.)

How Do I Shop for a Loan?

You’re shopping around for a car, house, or contractor. You should look for the best loan, too. Here are some things to consider during the process.

  • Check for fees. Some loans include prepayment penalties, which are assessed if you finish repaying a loan before the term expires. Other fees include origination fees, which are assessed at the beginning of your loan, and late fees, which can be especially steep on short-term loans.
  • Compare APRs. APRs, or the annual percentage rate, reflects not just the interest you’ll pay on a loan, but the value of the fees and other expenses that are part of your loan. Sometimes, lenders advertise ultra-low teaser rates, only to jack up the amount you’ll pay in other costs.
  • Use a loan calculator. This calculator shows how much you’ll pay back in interest over the life of the loan.
  • Prequalify without affecting your credit score. When you apply for a loan, lenders will check your credit—which can negatively affect your credit score. Pre-qualification is a way of giving a lender enough information to say roughly what you’ll be approved for before you complete the application process.
  • Shop around. Big, commercial banks aren’t the only source for loans. Online-only lenders and locally headquartered credit unions and banks also offer competitive loans. Adirondack Regional Federal Credit Union offers a full line of loan products, including mortgages, new and used car loans, boat and watercraft loans, motorcycle and ATV loans, RV and camper loans, snowmobile loans, personal loans, and more.

What can I expect when I apply for a loan?

Requirements vary by lender. Many loan applications, though, will require you to provide proof of income, such as a recent pay stub, W-2 form, bank statements or tax return. You’ll also need an official ID, such as a driver’s license.

The amount of time it takes to review your application depends on the type of loan you apply for. If you’ve already prequalified through a lender, it may take just minutes to approve a personal loan. Otherwise, it may take a couple of days to get approval. (Some loans, such as mortgages, take longer because an appraiser must look at the home you’re purchasing.)

What Lenders Look For

When you approach a lender for a loan, they want to know that you’re likely to pay it back. They rely on the “Five Cs of Credit” to gauge risk: character, capacity, capital, collateral and conditions.

  • Character is your credit history. Have you paid your debts in the past?
  • Capacity assesses whether your income-to-expense ratio gives you enough room to repay a loan.
  • Capital is the amount you’ll pay up-front for your loan (a down payment).
  • Collateral is an asset you’ll forfeit in case of non-payment.
  • Conditions represent a grab-bag of other factors, such as what you plan to use the money for and external economic conditions that may affect your ability to repay.

Lenders evaluate every applicant on these five Cs. Borrowers who have paid back their loans on time, have ample ability to repay a new loan, and meet the other criteria are considered the best credit risks, and, therefore, qualify for the lowest interest rates.

Less credit-worthy borrowers, though, are considered higher risks, and may have to pay higher rates.

How Much Will I Pay?

Let’s say you’re in the market for a new, $50,000 car. You’ve decided to make a down payment of $10,000, meaning you need a loan for $40,000.

That may be what you borrow from the bank—but it won’t be what you pay back. That’s because you’ll also pay interest on your loan. A shorter loan often carries a lower interest rate, meaning you’ll pay less to borrow money. But you’ll need to pay back more money every month. As you take a longer loan term, your monthly payments will fall, though your interest rate will increase (and so will your overall cost of securing the loan).

Ready to Apply?

Speak with a loan officer at any Adirondack Regional FCU branch, in Potsdam, Plattsburgh or Tupper Lake, to learn more about the loans we offer and which may be right for you. Stop by or call us today!