How Loans Work

“Money makes the world go round,” goes the old saying; but these days, it would be more accurate to say that credit makes the world go round. Most consumers in the U.S. turn to loans when they’re contemplating purchasing a big-ticket item like a car or a home. Even if your credit score is not high, you may be able to qualify for a substandard loan from a lender who works with high-risk borrowers.

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Factors Determining Credit Worthiness

When you borrow money from an institutional lender like a bank or a credit union, you will always end up paying back more money than you borrowed. The additional amount you owe is called interest. The higher the possibility that you may not be able to repay your loan, the more interest you are likely to be charged. Here are some things that lenders look at when they’re determining that risk:

• Your credit history: It will count in your favor if you have a solid track record of paying back the money you’ve borrowed in the past. Your credit score is a numeric metric that acts as a quick means of summarizing your credit history.

• Your capacity: “Capacity” refers to whether you’re in a position to pay back a loan. It’s determined on the basis of factors like your income, your employment history and the ratio of new to current debt in the amounts you already owe.

• Collateral: In some instances, you may be asked to secure your loan by pledging to surrender something you already own if you don’t repay the money you owe. When you apply for a mortgage, for example, you typically offer the equity you may acquire in the home you are buying as a collateral for the loan with which you buy the home.

What Is a Substandard Loan?

Substandard loans are typically loans made to individuals with poor credit histories and capacities who cannot pledge collateral of appreciable value. Interest rates on these types of loans are generally quite high. However, it may be worth it to acquire this type of debt if you know you can repay the loan, and you’re looking for a way to reestablish your credit history.

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