A Quick Look at the Modern World of Finance


The world as we currently know it would simply not exist without the underlying financial princples that we have come to take for granted. While some of the categorises themselves can be quite complicated, the ultimate principles are rather simple. All finances involve the exchanges of money, goods or services between two or more entities.


Having said this, many will argue that the roots of finance can be traced as far back as the Knights Templar. They were the first individuals to issue promissory notes in exchange for gold and other valuables. This was used in order to guarantee that crusaders could keep their possessions safe while traveling to the far corners of the Middle East.


Since these times, financial principles and practices have obviously evolved in leaps and bounds. We have now entered into the digital age, so there are more options at the disposal of the average individual than ever before. Some examples include online investing, one-off mortgages, the choice of numerous bank accounts and e-commerce platforms. Indeed, these technologies show no signs of slowing down.


What Does the Future Hold?


The fact of the matter is that we will always rely upon banks although entities such as PayPal are beginning to replace traditional lending institutions. However, the addition of “smart” technologies such as chatbots and artificial intelligence is changing the ways in which we interact with such institutions. Security is also a very real concern, as a growing number of cases involving identity theft and the corruption of personal data have made news headlines in recent times. Financial lenders and similar institutions will continue to adapt to such changing situations and consumers always need to be aware of the changing threats that may emerge. Whether we like it or not, the world of modern finance is here to stay.


How do Personal Loans Function?


If you require money to purchase a car or to pay off an existing expenditure, a personal loan could represent the perfect option. In truth, most of us will require these financial vehicles at least once during our lifetime and many employ loans on a somewhat regular basis in order to enjoy a superior level of liquidity. There is nonetheless a slight stigma surrounding these vehicles and phrases such as “debt” and “default” will often detract from the benefits associated with the loans themselves. Let's attempt to do away with these and other misconceptions by quickly examining the ways that such loans function before looking at some of the most common variants currently available.


The Mechanics Behind a Typical Personal Loan


The core concept behind any type of personal loan is rather simple. The individual (borrower) speaks with a financial institution (known as the lender). He or she requests a certain amount of money. Assuming that their credit is positive, the institution will provide this money in the form of a liquid loan. A certain amount of monthly interest is attached to the loan itself. This interest must be repaid with the initial amount requested (known as the principal). Assuming that these conditions are met, it will be possible to request an additional loan. If the borrower happens to miss numerous payments or simply refuses to settle (commonly known as a default), credit reporting agencies and even debt collectors may become involved. Still, personal loans are often necessary in order to purchase goods or services that would otherwise prove to be too expensive in relation to the funds contained within a typical bank account.


Unsecured Personal Loans


Unsecured personal loans are lending vehicles that will not require any type of collateral. In other words, you will be approved for a certain amount of money without needing to use your home, car or other valuables as a negotiating factor. Unsecured loans are generally reserved for those who are associated with extremely high credit scores (the banks are not likely to lose money in terms of a default). Those with poor personal credit or a bad history of repayments will likely need to request a secured personal loan, which brings us to the next topic.


Secured Pesonal Loans


A secured personal loan is associated with some form of collateral. For example, let's imagine that you need a specific amount of money to purchase a new vehicle. If your credit rating is less than perfect, the lender will require some means to recuperate the funds in the event that they are lost due to a default. This is known as a “secured” loan, as the money is secured against collateral of a specific value. This is also the most common type of loan currently on the market.


The Difference Between Fixed and Variable Interest Rates


You have likely seen the terms “fixed” and “variable” APR when examining the different types of personal loans. What do these phrases signify and why are they important factors to keep in mind?


Fixed interest rates guarantee that the rates will not change during the lifespan of the loan. The main advantage here is that you will know exactly what you are expected to pay each month. You are also made aware of the aggregate amount (the principal and the interest) that will be required at the end of the loan itself.


Variable interest rates will change depending upon the decisions of the Federal Reserve. While this can be a a great scenario if the rates happen to lower, the exact opposite is also true. Increase rates could signify that you are actually obliged to pay much more than you initially anticipated. This is why choosing a variable rate personal loan should only be done after having performed an adequate amount of research.


When Should You Apply for a Personal Loan?


Assuming that you do not have sufficient liquidity to complete a major purchase, a personal loan could be a wise choice. However, avoid these vehicles if you already have outstanding debt. You could only dig yourself deeper into a financial “hole”. If you are ever in doubt, speak with a certified adviser in order to better appreciate your options. These loans can be amazing vehicles if they are used in the correct manner.


A Look at Credit Repayment Scenarios


B y its very nature, credit is a temporary entity. Regardless of the amount of the loan (short-term in the form of a credit card or long-term as is seen in a mortgage), you will eventually be required to pay back the initial amount owed. Interest will also be attached to these payments, so it is important to appreciate how typical credit repayment schemes function as well as to appreciate what pitfalls to avoid along the way.


Repaying a Loan: Where to Begin


Before you ever begin to contemplate requesting a loan it is critical to determine whether or not you can make the required payments once the program comes to maturity. This is the biggest mistake that countless applicants make; particularly those who are requesting a loan for the first time (such as college students).


The other major concern is what the loan is intended to be used for. Some applicants request this vehicle in order to purchase items that might not be entirely necessary (such as an expensive luxury vehicle or a boat). Although the short-term gratification might seem worth the investment, the fact of the matter is that the long-term repercussions can cause grave consequences from a financial point of view.


Assuming that the reasons for the personal loan are valid, the next step is to take into account the time that you have to repay the principal. All reputable providers will make this window clear from the very beginning, so there should be few surprises to encounter along the way. Still, always read the “fine print” found within the terms and conditions. Keep an eye out for any confusing phrases and be certain that these are clarified before signing the proverbial dotted line. Remember that your future liquidity and your personal credit score will depend entirely upon the ability to make the required payments within the applicable time frame.


Taking Interest Into Account


A loan can be segmented into two discrete portions:


  • The principal (the amount requested)

  • The interest


Knowing the associated interest payments is another important metric that should never be taken lightly. You will be required to pay a certain amount of interest every month for the entire lifespan of the loan, so such small increments can quickly add up. It is also important to mention that those who possess poor credit scores will often be required to pay higher interest rates (due to the increased risk of late payments or defaulting). If you cannot afford to repay the interest along with the initial balance, it is best to speak to a different lender.


Knowing Monthly Repayment Plans


All personal loans are associated with some type of repayment period. In the majority of cases, you will be required to make payments (installments) on a monthly basis for the duration of the loan. The first payment generally begins once the lender has approved the transaction. In certain instances, you might be required to make a down payment (such as when taking a loan out for a vehicle). Take a look at the total number of months which are required to settle the loan. Then compare this figure with the possibility of meeting such obligations. If there is any doubt that you will be able to satisfy the requirements of the lender, it is wise to take a step back and consider your options.


The Penalties Associated with Late Payments


Late personal loan payments are your worst enemy. Lenders will frown upon such habits and they will often result in higher interest rates. In turn, this can make it even more difficult to meet future obligations. A vicious cycle is often the end result; further harming your credit rating. You therefore need to be responsible with your spending habits and if you are ever in doubt, speak with the institution in order to determine if it possible to enjoy a temporary “grace” period.


What if You Default?


This is always the worst-case scenario. Defaulting on a personal loan will make it virtually impossible to apply for a similar package in the foreseeable future. Should you fail to make the necessary payments, it is more than likely that your credit score will suffer as a result. There are even instances when debt collection agencies could become involved.


Repaying any type of loan is always a critical concern and by appreciating the issues mentioned above, you will be able to avert any unforeseen circumstances. Please feel free to refer back to this article as a guide or simply as a means to understand your options.