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Lending 101: Unraveling the Basics of Loans

Updated: Nov 13, 2023

Navigating the world of loans can feel overwhelming, especially when confronted with industry jargon and myriad options. However, understanding the fundamental principles of lending can not only demystify the process but also empower you to make informed decisions. Whether you're a budding entrepreneur or an individual looking to purchase a home, this primer on lending will set a solid foundation.

What is a Loan?: At its essence, a loan is an amount of money borrowed from a lender (like a bank or financial institution) that is expected to be paid back with interest. The lender provides the funds, and in return, the borrower agrees to repay the loan amount plus interest over a predetermined period.

Key Lending Concepts

Fixed Interest vs. Compounding Interest:

  • Fixed Interest: This is a flat rate applied to the principal amount throughout the loan's lifespan. Your monthly payments remain consistent.

  • Compounding Interest: Interest is calculated on the initial principal, which also includes accumulated interest from previous periods. This can result in the interest amount increasing over time.

APR (Annual Percentage Rate): APR represents the yearly cost of borrowing. It includes both the interest rate and any associated fees. It provides borrowers with a comprehensive view of the loan's total cost, making it easier to compare different loan offers.

How Banks Earn: Banks primarily make money on the difference between interest paid to them (by borrowers) and interest they pay out (to depositors). This difference is known as the 'interest rate spread.

Primary Types of Loans:

  1. Mortgages: Secured loans specifically for purchasing real estate. The property itself typically acts as collateral.

  2. Commercial Loans: Designed for businesses, these can fund operations, expansions, or capital expenditures.

  3. Hard Money Loans: Short-term loans with real estate as collateral. These are often sought by real estate investors looking for quick financing.

  4. Merchant Cash Advances (MCAs): A business receives an upfront sum and agrees to repay by remitting a percentage of its daily credit card sales.

  5. Personal Loans: Unsecured loans provided based on an individual's creditworthiness, typically for personal use like home renovation or debt consolidation.

Understanding the world of lending ensures you're equipped to make decisions that align with your financial objectives. Whether you're considering a mortgage or exploring business financing, knowledge is your greatest ally.

Interested in exploring loan options tailored to your needs? Sign up with Quantifi for a no-risk qualification check and let us guide you through the intricacies of commercial lending.

– The Quantifi Team

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