The word loan essentially refers to a form of financial credit instrument in which a predetermined amount of money is loaned to another party on the basis of future repayment of principal value or face value. In most cases, the loaned amount is repaid by the borrower as well as the creditor at some point in the future. The purpose of a loan is to provide financial resources to businesses or individuals for short-term needs. Business loans are required for startup and ongoing business expenses.
In contrast, a loan to buy real estate may be used for long-term investment and for purposes such as home purchase, rehabbing, or to expand a current business. As a general rule, mortgages are paid back with the increase in the loan principal amount over the term of the loan. Most mortgagees use interest as a form of repayment. Interest is charged at a variable rate, and the term of repayment may be up to 30 years in duration.
Creditworthiness, or the creditworthiness of a borrower, is an important factor that influences various aspects of the lending decision. A. Fannie Mae and Freddie Mac are the two main federal organizations that guarantee credit worthiness. This is based on the credit history of the individual. There are several factors that lenders consider when determining creditworthiness, including a borrower’s payment history and current income, debt-to-income ratio, types of credit extended (owner-occupied, debt-to-equity), and the period of time since last loan.
Another factor considered by most lenders is whether the requested loan amount is feasible within the capacity of the borrower. Lenders are not necessarily concerned about the borrower’s financial situation. They only want to make sure that the loan is affordable and will be repaid. However, if the loan request is too large for the individual to repay, then the loan request would be considered unsecure. This would essentially mean that the borrower could not possibly repay the borrowed amount and therefore must pay off the entire amount owed.
The lender has the inherent right to recoup the entire amount of borrowed funds once the loan contract ends. This means that if the borrower is unable to pay off the full loan amount, then he/she can lose his/her ownership in the property and be forced to obtain a new mortgage. On the other hand, if the income and creditworthiness of the individual are high enough, then a bank may approve a low-interest or no-interest loan agreement. The decision of the bank would still depend on several factors such as the borrower’s payment history and current income, down payment made, the value of the property, and the possibility of increasing the equity.
One very important condition that prospective borrowers must fulfill before being approved for a loan is providing security or assets as collateral. In most cases, banks and other lending institutions only require a secured loan amount in exchange for the loan. In cases where the collateral does not exist, the bank could opt for some assets such as business or home real estate. Most often, personal valuables such as jewelry, artwork, expensive cars, boats, and other items of great value are availed as security for these types of loans. A borrower should keep in mind that securing a loan involves a risk. Therefore, he/she should only go for loans that he/she is capable of repaying.