There are a variety of loan options available to consumers, including:
- CD Secured Loans
- Unsecured Loans or Personal Signature Loans
- Vehicle Loans
- Real Estate Loans
- Small-Business Loans
To apply for a loan with your financial institution, you should first understand some loan terminology.
The loan term refers to the amount of time you are agreeing to repay the loan to the financial institution.
Loans can be secured or unsecured. A secured loan is a promise to pay a debt, where the promise is "secured" by granting the creditor some type of collateral. If you default on the loan, the creditor can recoup the money by seizing and liquidating this collateral. The lender will often minimize their risk by conservatively valuing this collateral and loaning only a portion of the collateral’s appraised value. The maximum loan amount as compared to the value of this collateral is known as the loan-to-share ratio. An unsecured loan is also a promise to pay a debt but this promise is not backed by collateral. The lender is relying upon your creditworthiness and reputation to repay the obligation. An example of an unsecured loan is a revolving consumer credit card.
If you were to default on an unsecured loan, the creditor has no priority claim against any particular property but can try to obtain a money judgment against the borrower.
Most financial institutions will offer a portfolio of loan products to choose from and will help you to find the financing that will work according to your specific income level. Step one in the consumer lending process is for you to complete a loan application with your financial institution. Throughout this application process, you can expect to be asked about yourself, and about a co-applicant (if there is one), where you and your co applicant live and work, your income, assets, debts and any other payments your are currently responsible for.
Once this is submitted, you grant the financial institution the right to pull your credit for review. Based on your application details and your credit review, the financial institution will then notify you of your approval status and the maximum monetary amount they are willing to loan you. The loan representative will then work with you to determine your specific repayment options based on the loan amount, terms, collateral, etc. There may be some additional information required, such as valid identification, evidence of employment, tax returns, automobile title, property tax notice, trust documents, etc.
In today’s world, most lending decisions can be made fairly quickly – from a few hours to a few days depending on the financial institution’s technology, your lending needs and the type of loan.
Types of Loans
CD Secured Loans
If you are looking for the least expensive way to borrow money, many financial institutions offer loans secured by Certificates of Deposit. A CD secured loan is a great way to begin to establish credit or to reestablish a damaged credit history. Often you can borrow up to100% of your CD’s worth with rates usually set close to Prime.
Unsecured Loans or Personal Signature Loans
Most financial institutions offer loans on an unsecured basis for almost any purpose. A personal signature loan can help you pay for everyday items or unexpected emergency expenses such as household goods, medical costs, automotive expenses or any personal need. An unsecured loan allows you to borrow without collateral. Your loan amount will be based on your income and ability to repay. Loan terms and rates will all be subject to your personal credit history and the financial institution’s lending policies.
New or Used Automobile Loans
Many financial institutions will finance your new or used car up to 100% – including money for taxes, licensing, and approved warranty contracts. Lenders offer a variety of flexible payment options, with terms typically up to 72 months.
New or Used Boat or RV Loan
Many financial institutions will help you to afford your favorite outdoor recreational activities with financing for your new or used motor home, travel trailer, boat, motorcycle, snowmobile or personal water craft. Most of these type loans offer flexible terms and fixed rates. Many financial institutions will even help you to refinance your existing boat loan.
It’s always a good idea to get pre-approved for a loan prior to negotiating or buying your vehicle. This way you’ll know how much you can spend before you get your heart set on something you might not be able to afford.
Here are a few steps to an easy and smart vehicle buying process:
Step 1 - Pick out the vehicle you want to buy – Do your homework by reading online reviews, taking different cars out for test drives, obtaining a copy of the window sticker price, list of associated fees and exact sales tax rate for your purchase.
Step 2 - Find out how much the car should cost – Continue your homework by researching online at Edmunds.com or kbb.com (Kelly Blue Book) to understand exactly how much the car should cost and what you should pay. You can use the aforementioned items you gathered to complete the necessary online questionnaire at these sites. Then you can review the following;
- MSRP - Should be very close to the suggested retail price on the sticker. If it is, then you know you've put in all of the right information.
- Invoice price - The price the dealer paid for the car.
- Average transaction price - Edmunds calls this "What Others Are Paying." Kelley refers to it as "The New Car Blue Book Value." It will usually be somewhere between the retail price and invoice price.
Step 3 - Secure the loan – You can perform online research at websites such as bankrate.com to understand the average car loan rates. Then work with your financial institution to initiate the vehicle loan application process and discover what you can afford, your loan term and your monthly payments.
Step 4 - Research the discounts – Be sure to research any associated discount offers such as rebates vs. low-cost financing and analyze which option saves you the most money.
Step 5 - Know what price you are willing to pay for the car – Your goal should be to pay somewhere between the invoice price and the average transaction price. Being a smart consumer should allow you to pay less than the average consumer.
Step 6 - Make an offer – Negotiate the deal, understanding you have complete control of the situation. Let the salesperson offer the first bid, then you can counter with the price and negotiate until you feel as though you have a fair deal.
Real Estate Loans
A mortgage is a loan that you obtain to close the gap between the cash you have for a down payment on a home and the purchase price of that home. There are a number of mortgage loans to choose from. It’s important for you to understand the pros and cons of each so you can know which option will work best for your budget.
With a fixed-rate mortgage loan, your interest rate will never change, regardless of what the economy does. You can get this fixed-rate mortgage usually in 10-, 15-, or 30-year terms. So your monthly mortgage rate will not change throughout this term. The only con to this loan is that you’ll pay a premium for this predictability in the form of a higher interest rate. When the lender grants your fixed-rate loan, they take a risk. If the prime interest rate increases during this loan, the lender will have to pay the difference. This option is good for the home buyer who wants to know how much their house payment will be every month.
Adjustable-Rate Mortgage (ARM)
Adjustable-rate mortgages, or ARMS, have interest rates that adjust periodically during the life of the loan. Most ARMs begin with a fixed rate for an initial period of time (often 3, 5 or 7 years). During this introductory period, the rate is fixed and won’t change. However once this period ends, the loan will convert (increase or decrease) to an adjustable rate based on the market. The rates are usually lower than a fixed-rate mortgage because the buyer is assuming a lot of the risk. The con of this loan is that you can never predict the interest rate. However, if you enter into this type of loan due to financial status, you can always refinance prior to the end of the introductory period (before the rate changes) and hopefully secure a more stable interest rate.
A balloon loan begins with a fixed interest rate for a set number of years. But unlike traditional fixed-rate mortgages, the interest rates on balloon loans are nearly as low as those found on adjustable rate mortgages (ARMs). However, the problem is the term. The initial fixed-rate period is usually 7 to 10 years. Following this period, you have to pay off the loan's remaining balance in full. So the homeowner must be prepared for this very large payment, or refinance their balloon prior to the end of this period. This is a good mortgage option for those who want to live in the property more than the life of the loan, want to pay the mortgage off quickly, like stable monthly payments, or plan to move before the life of the loan, in which the loan can be assumable and passed to another buyer.
Mortgage refinancing is when you replace your existing mortgage loan(s) with a new loan, usually secured by the same assets. The most common type of refinancing is for home mortgages. The main goal to refinancing is to lower your monthly payment or reduce your payment period. However you should note that many types of refinancing options contain penalties for early payments as well as closing and transaction fees. So you’ll want o make sure that these extra fees do not offset the savings you’d get with the refinance.
Home Equity Loan
A home equity loan or second mortgage loan allows a homeowner to obtain a loan by using the equity built up in the home as collateral. The equity consists of whatever funds the homeowner has invested in the property. A home equity loan is a fixed-rate loan with terms generally ranging from 5 to 15 years.
A single lump sum payment is issued by the lender to the borrower. That amount is then repaid over a set period of time at an agreed upon interest rate. The payment and interest rate remain the same over the life of the loan.
Home equity loans also have special tax advantages. With a home equity loan, homeowners can borrow up to $100,000 and still deduct all of the interest when filing tax returns.
You can use a home equity loan calculator to check what various home equity loan rates will mean for your monthly payments. Always compare offers from several lenders and brokers to obtain the lowest home equity rate possible.
Home equity loans can be valuable tools for responsible borrowers. As long as you have a steady, reliable source of income and know that you will be able to repay the loan, the low interest rate and tax deductibility of paid interest makes this loan a very sensible alternative. Fixed-rate home equity loans are especially good to help cover the cost of a single, large purchase, such a new roof on your home or an unexpected medical bill. And the home equity loan provides a convenient way to cover short-term, recurring costs, such as the quarterly tuition for a four-year degree at a college.
Home Equity Line of Credit (HELOC)
More and more financial institutions are offering home equity lines of credit. By using the equity built up in your home, you may qualify for a sizable amount of credit, available for use for anything and at an interest rate that is relatively low. Also, under the tax law and depending on your specific situation, you may be allowed to deduct the interest, because the debt is secured by your home.
With a home equity line, you are approved for a specific amount of credit, the maximum amount you may borrow at any one time under the plan. Many financial institutions set the credit limit on a home equity line by taking a percentage of the home's appraised value and subtracting the balance owed on the existing mortgage. Most plans are set at a fixed period during which you can borrow money, such as 10 years. At the end of this period, you may choose to extend the credit line if the plan allows. Depending on the plan, there may be limitations of use. Some plans might require you borrow a minimum amount each time you draw on the line and to keep a minimum amount outstanding.
HELOCs typically are based on variable rates rather than fixed rates, so your monthly payment may change. If you sell your home, you will likely be required to pay off your line in full immediately. If you are likely to sell your home in the near future, consider whether it makes sense to pay the up-front costs of setting up a line of credit.
More credit unions today are getting into the business of issuing small-business loans. If you are considering applying for a small-business loan, you’ll want to do a little research ahead of time and have your documentation ready. First, your personal credit history is relevant to your small-business loan – especially if your business does not have a long operating history. Small-business lenders will assume that you operate your business in the same manner that you manage your personal finances. It’s a good idea to have your credit history on hand when sitting down to talk to a credit union (or other lender) about a small-business loan.
Secondly, you’ll want to bring any financial statements you have for your business. It’s important for the lender to understand how much the business is worth and profitability level/potential. You might also prepare detailed pro-forma statements which offer projections about what your business will be worth moving forward.
Last, make sure you have a copy of an up-to-date business plan. A detailed business plan will give the lender an idea of your operational and financial strategies.
Credit unions are great alternatives to banks or other lenders for small-business loans because they are smaller and often grant you the opportunity to discuss your specific request with higher-level decision makers. Larger financial institutions also often have more strict rules and processes associated with these types of loans.
For additional information on loans or other resources/tools for your small business, you might visit the U.S. Small Business Administration’s website.