What Factors Affect Your Finance Loans?
Doug Smith

Defined Tag: Finance Loans.

Purchases that are too big to pay with cash usually require finance loans. These loans allow you to borrow a large lump sum of cash to pay for something such as a home, car, or boat. In return, you promise to begin repaying the loan amount to the credit union or bank in small monthly payments, until the loan is entirely repaid. Furthermore, the bank charges you a fee for the use of their lump sum of money. This fee is called interest, and is typically a percentage of the loan principal.

The first thing you need to consider before financing a loan is the amount you need to borrow. The next thing you need to know is how cash much your bank or credit union is willing to lend to you. The lending amount depends on many things, such as your credit score, credit history, salary, financial assets (savings, home, etc.), debts, and similar criteria. If you want to buy a $150,000 house and the bank is only willing to lend you $125,000, you need to either find a new lender, or find a second lender willing to lend you the remainder of the loan.

On the other hand, if the credit union is willing to lend you $150,000 and you only need $125,000, do not be greedy and take the whole $150,000. Borrow only what you need to finance your purchase. If you gamble or waste the extra $25,000 then you are putting yourself at financial risk of defaulting on the loan. There is simply no need to take on more debt when making such a large purchase.

The second thing to consider is the interest rate, also called the time value of money. This is the finance fee the bank charges you for the use of the lump sum of money. This fee is typically a percentage of the loan principal. If the interest rate is 10% on a $100,000 loan, then the total amount you must repay is $100,000 financed + $10,000 interest = $110,000.

It will cost you $10,000 for financing your loan with the bank's money in the example above. The total amount will be divided into monthly payments over the life of the loan. Each payment will consist of a principal amount plus some interest. Usually the finances are arranged so that each one is the same amount. As you make more payments, however, the interest part of the payment decreases while the principal amount increases, keeping the sum constant over time.

There are many lending institutions willing to lend you money. Consult several before making a decision. Try to find one that offers you the highest lending amount with the lowest interest rate. You also want a long payback period so that the monthly payments are low, but not so long that you are paying for finance loans for the rest of your life!

Copyright 2008 by Doug Smith. All Rights Reserved Worldwide. Unauthorized Duplication Prohibited. Not Intended As Professional Advice.