Basics of borrowing: Loans 101
Have you ever been in a pinch, financially? This is why loans exist; to relieve us from such dilemmas while offering — ideally — a feasible solution for us to repay them back.
Borrowing money from a bank is not so different from borrowing money from a friend — it’s just more structured, that’s all. While a friend may ask that you pay them back the whole amount in one go, a bank doesn’t really function like that. It allows you to pay back your loan in small, structured payments while adding an interest rate to each payment.
For example, if you want to get your hands on a 10,000 JOD personal loan, your bank will divide the borrowed amount into smaller payments of 1,000 JOD each over a period of 10 months. It will also add an interest rate over each payment.
Let’s get into loans in more detail
As you may already know, there are two kinds of loans that are self explanatory: personal loans and small business loans. Personal loans are, well, personal, used for private purposes such as buying a car or a house, or even redecorating your place.
A small business loan is the one you apply for if you want to start a new business venture, or if you already have one and are looking to expand and scale, which includes opening new branches in new areas or hiring new employees. Business loans are especially useful for business owners who don’t want to turn to outside investors or give up equity of their company.
Both personal loans and loans for small businesses come in a range of types, from mortgage and auto loans to lines of credit and installment loans. But here’s what they all have in common: they all need some kind of guarantee that you can repay the loan, and this comes in the following forms:
Proof of stable income
Proof that you have a full-time job with a steady salary is one of the most important guarantees you can make monthly payments to the bank.
Acceptable credit history
A person’s credit history is recorded in their credit report. A consumer’s credit report details the number and types of credit accounts, amounts owed, the amount of available credit used, whether previous loan or credit card instalments are paid on time, and the number of recent credit inquiries.
Collateral
A collateral loan only covers housing or land loan (property mortgage) and auto loans (car mortgage).
In loan agreements, collateral is a borrower’s pledge of specific property to a lender, to secure repayment of a loan. The collateral serves as a lender’s protection against a borrower’s default and can be used to offset the loan if the borrower fails to pay the amount and interest satisfactorily under the terms of the lending agreement.
What happens if I’m unable to pay my loan installment this month?
Don’t worry. There’s something called “the deferred period”, which you can do twice a year only. In essence, the bank presses ‘pause’ on the loan repayment process for a specific amount of time.
Depending on the loan, interest may accumulate during the deferment period, which means the interest is then actually added to the amount due at the END of the deferment period, when it’s time to pay back your loan again. So it might not be the most advisable situation, but it has its benefits in certain circumstances.
How to make a deferred payment?
First of all, it’s important to note that when you surpass the deferment period and are ready to repay your loan at the bank, then each monthly payment is made up of the original borrowed amount plus the accumulated interest. That is only fair.
If you want to apply for a deferred payment, you can simply apply for one through your mobile banking app.
There are different kinds of loans to help you financially that require different paperwork; it’s important that you have your affairs in order and be willing to fulfill all the requirements that the bank asks of you. Finally, if you decide a loan will help you reach your short term or long term financial goals, go after it.
