Loans

Loans

A loan is a certain amount of money that a financial institution lends to an individual or business, expecting to receive it back after a set amount of time. When someone requests a loan, they indicate how much money they need and how long it will take them to repay it. Then, the institution evaluates the request and decides whether to grant the loan. If they do grant it, both parties sign a contract and the individual or business receives the requested amount. Then, they are expected to make monthly payments until the loan is repaid.

Most loans have an interest rate, which means that the person pays the requested amount plus an extra amount determined by the interest rate. This percentage to be paid depends on factors like the ability the person has to repay the loan. The more able you are to repay, the lower the interest rate tends to be.

Requirements to Request a Loan

The main two requirements are being legally of age and being able to repay the loan. The first requirement is fulfilled by providing a valid identity document. The second requirement can be proven with a variety of documents. Certificates of employment, one-month full payslips, and tax returns are some documents that prove that the person has a regular income stream that will allow them to repay the debt. Additionally, businesses or self-employed individuals may have to prove being registered as a legal business. These might be a Mayor’s permit and registration certificates. 

You also need to have a good credit history to prove you can pay back the loan. For this, lenders use your ID to check your score in the Credit Information Corporation (CIC). This organization assigns a credit score ranging from 300 to 850 points. A score below 650  is considered risky for lenders, as the closer the score is to 300, it indicates increasingly late payments or defaulted loans. A good score is above 650 and a strong score starts at 759. These higher scores indicate debts repaid on time or early and responsible financial behavior.

Types of Loans

The loans in the Philippines are classified by the purpose of the loan and by the person they are granted to. By purpose, we have auto, mortgage, home equity, student, and salary loans. And by who they’re granted to, we have personal and business loans.

• Personal Loan: This type of loan can be used for any purpose. The conditions vary depending on the lender, but generally, the term of the loan can be up to 5 years, and the interest rate, up to 36%.

• Business Loan: This loan is meant to help businesses that need funding for a particular project or to continue afloat. The term can be up to 10 years and the interest rate usually only goes up to 10%. 

• Auto Loan: This loan is used to buy a car. Terms generally can be up to 5 years and the interest rate, up to 20%. 

• Mortgage Loan: It’s meant to finance the purchase of a home. It’s the loan with the longest term, up to 30 years, and the interest rate usually doesn’t go past 10%. 

• Home Equity Loan: For this loan, you use a property you own as collateral. The purpose is flexible, as it can be to purchase a second property or to renovate or expand your existing home. The term can be up to 10 years, and the interest rate, up to 10%. 

• Student Loan: This type of loan is meant to finance education for an individual. The term tends to be for up to 5 years, and the interest rate usually doesn’t go above 10%.

• Salary Loan: With this loan, the person can receive one or two months of their usual salary to help resolve an unexpected financial setback. Since the purpose is to deal with emergencies, the term is 2 years max, and the interest can reach 40%.

Auto, Mortgage, Home Equity, and Business loans have collateral, which helps the interest rate be lower. Secured loans like these represent a lower risk for the lender. Salary and personal loans are unsecured, with no collateral, so the interest rate tends to be significantly higher. Student loans are also unsecured, but the interest is kept low to help the young people with little work experience who usually request them.

A loan with collateral means that the bank or financial institution can take the asset, such as the car, home, or business, as compensation for an unpaid loan. Having this asset as a means to get their money back makes the loan less risky, so they can afford to lower the interest rate. 

How to Choose a Loan

The first step is to consider what you need the loan for. If you want to get a home or start a business, then there are loans specifically designed for that. If the loans for a specific purpose don’t align with what you need, then a personal loan might be your best bet. Choosing the right type is important because trying to buy a car with a personal loan will mean that you have a large amount to repay with higher interest and less time to pay it. Getting the right loan for the job makes your life easier.

Once you know what type of loan you’ll get, the next step is to determine how much money you need and compare loan providers. You can use Credilemon to compare different offers and find the ones that offer the amount to want. 

Then, among those, try to find a good balance between a lower interest rate and a repayment term that you can meet. Usually, a short term comes with lower interest rates, but if paying immediately will be difficult for you, then a longer term might be best. Try to choose the shortest term that you can comfortably afford to pay. Also, consider the amount you’re requesting, as the higher it is, the longer it’ll take to pay. You can use a calculator to see how much you’d have to pay each month and decide if you can do it or not.

Finally, also consider other expenses and conditions such as application or late payment fees. If you know all of these in advance, then they can’t catch you off guard and throw off your plans.