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Loans

Loans can be used to finance nearly any type of purchase. From buying houses and cars to financing dental treatment and paying for college tuition, loans provide necessary funds when borrowers do not have enough money in their savings account.

While loans can be helpful in obtaining expensive items, borrowers must have the financial resources to repay their debt. Otherwise, they could end up ruining their credit and eventually forced into bankruptcy.

Prior to the economic recession, loans were relatively easy to obtain. In many cases, lenders engaged in 'no income verification' and 'no credit check' loans; making it easy for applicants with bad credit to obtain financing.

Today, borrowers undergo stricter lending procedures and required to submit substantial financial documentation including payroll records, tax returns, and detailed list of income and expenses. Many lenders consider a solid work history and high FICO score as top lending criteria. The days of getting a bad credit 'no paperwork' loan are gone.

Borrowers should take time to understand the advantages and disadvantages of obtaining any type of loan. Nearly every loan is assessed with interest. Even family members can charge interest by writing up a promissory note.

The rate of interest is determined by the type of loan and borrower's credit. In some cases, banks require a creditworthy co-signer before loan approval is granted. Credit cards often carry hefty interest rates ranging between 9- and 23-percent, while mortgage loans are usually assessed the least amount of interest, which currently hovers around 5-percent.

Mortgage loans for bad credit assess a higher rate of interest because borrowers are considered high risk. Individuals who want to buy a house, but whose credit rating prohibits them from doing so still has a few options to help them achieve their dream of homeownership.

The most practical option is to spend time paying off credit cards and outstanding debts. Depending on the severity of credit damage, restoring credit to qualify for a home loan can take two or more years.

If borrowers are not able to resolve bad credit issues they might want to consider seeking out lease-to-own properties or locate buyers willing to offer seller carry back financing. Rent-to-own involves providing a down payment to the property owner and contributing a portion of rent monies toward purchasing the home. Seller carry back requires property owners to act as a lender for all or a portion of the purchase price.

Borrowers who obtain bad credit loans should strive to make home loan payments on time and in full, while also engaging in credit repair of previous debts. Once borrowers achieve a high FICO score, they can enter into mortgage refinancing to obtain a lower rate of interest.

Homeowners with good credit can refinance mortgages when interest rates drop. It is important to understand several costs are associated with mortgage refinance. Most home loans include a prepayment clause for paying loans off early. Additional costs can include real estate appraisals and inspections, points, closing costs and legal fees.

Graduates with multiple student loans can consolidate to reduce overall interest. Several options exist for college loan consolidation and will vary depending on whether loans are private or federal.

Loans can help you start a business, purchase real estate or cash flow investments, own a home and further your education. They can also destroy your financial credibility. Take time to weigh the pros and cons of entering into loan agreements and always adhere to loan obligations.

If you would like to learn how to keep or take control of finances visit our personal finance and loans articles library. Topics include first time house buyer tips, real estate investing secrets, and money management strategies for building personal wealth.