Balloons, Collateral, and More: Knowing the Terminology of Your Loan is Important

When it comes to loan paperwork, many people only take a good look at the monthly payment and largely ignore the “fine print,” especially if they do not really understand what the fine print means. While the amount due is the most important line on the form, the other information is vital as well. At best, a failure to properly understand loan terms often leads to unwanted surprises; at worst, such a failure can lead to disaster.

Hopefully, this post will be a good resource for some basic information about common financial terms.

Short-Term Periodic Loans

These installment loans are not for everyone. Such cash loans should only be used for financial emergencies, like unexpected repairs, and not for other purposes, such as weekend getaways. Furthermore, short-term loans usually have high interest rates, so be sure you can repay the loan on a timely basis.

Properly used, these loans are good tools. The approval process takes only a few minutes, and the approval rate is quite high. The cash usually arrives in an checking account within a few hours, which is another big benefit. These kids of loans are also more convenient and secure than ever before, because most applications are entirely online and your personal information is encrypted to the max.

Collateral/Security

Most larger loans require some form of collateral or security. Collateral is usually property currently in the debtor’s possession which the creditor can seize if the debtor does not repay the loan. Other loans are secured by the property which the debtor purchases; for example, a house secures a mortgage loan and a car secures a vehicle loan. The same rules apply as for when the creditor can repossess the secured property.

Debtors (people who borrow money) have rights in these cases. A creditor cannot repossess secured property or seize collateral at the drop of a hat. Instead, the creditor must usually give the debtor notice of the delinquency and an opportunity to cure said delinquency.

Other matters aside from nonpayment may trigger adverse action. If the debtor fails to live up to any other conditions in the loan contract, such as a failure to maintain insurance, the creditor may also take adverse action.

Balloon Payment

These arrangements are very common in many secured property transactions. Essentially, the first several monthly periodic payments are rather low. Then, the final payment is very high, because the debtor must pay off the balance of the loan in one lump sum. Balloon payments are often a good idea if the debtor either does not plan to keep the property for very long or will refinance the final payment with another lender. Both these strategies are risky, so use caution with balloon payment financing.

Credit Score Impact

Most people know that on-time payments drive their credit scores up, and late payments have the opposite effect. But many people do not know that simply filing a loan application or giving a lender permission to access your credit report may adversely affect your credit score. Again, use caution when applying for loans, especially because not all credit checks affect your score in the same way.

Some basic financial sense will help you get the money you need and also enable you to make better choices during the process.

 

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