Getting a Loan: Frequently Asked Questions
Whether you are buying a home, a car or financing an education, understanding how loans work will help you borrow wisely. Here are answers to common questions.
How do lenders decide whether to approve me?
They look at your credit history and score, your income and employment, your existing debts compared with your income, and, for secured loans, the value of the collateral. A stronger profile generally earns a lower interest rate.
What is the difference between secured and unsecured loans?
A secured loan is backed by collateral, such as a house or a car, which the lender can take if you default. An unsecured loan, like most credit cards and personal loans, has no collateral and usually carries a higher interest rate.
What is the difference between a fixed and an adjustable rate?
A fixed rate stays the same for the life of the loan. An adjustable rate starts out lower but can change over time, so your payment may rise. Fixed rates offer predictability, while adjustable rates may suit someone who expects to repay or sell in the near term.
What should I compare among offers?
- The annual percentage rate (APR), which includes certain fees
- The loan term and monthly payment
- Origination fees, closing costs and prepayment penalties
- Whether the rate is fixed or adjustable
The Consumer Financial Protection Bureau has plain-language guides on shopping for loans.
Is loan interest deductible?
Some interest is deductible and some is not. Mortgage interest on a main or second home may be deductible if you itemize and meet the limits. Student loan interest may be deductible within income limits. Interest on car loans and credit cards for personal use is generally not. Check current rules at irs.gov.
Should I make extra payments?
Paying more than required usually reduces total interest and shortens the loan, as long as there is no prepayment penalty. But weigh it against building an emergency fund and paying down higher-rate debt first.
What if I fall behind on payments?
Contact your lender before you miss a payment. Many offer hardship programs, modifications or temporary relief. Ignoring the problem can damage your credit and, for secured loans, put your property at risk.
If you are considering a major loan, get in touch with us to talk about how it fits your overall finances.
This article is general information, not tax, legal or investment advice for your specific situation.