What Are The Factors That Can Affect The Terms Of Your Loan?
While there are many things business owners can consider when looking into loans for their companies, it’s important to understand the risks and pitfalls ahead of you. Many different types of loans are available to businesses, but lending amount under various types of loans is different.
Understanding your loan options and how they could affect the terms is key to making the right decision for your company and its future growth. Read on to learn more about the eight major factors that can influence the terms of your loan.
- The Amount You Need As Loan
This factor has the most significant effect on the terms of your loan. You will likely default if your loan request isn’t backed by enough income to make payments. In some cases, this can lead to costly consequences. If you need more clarification on how much you need, your first step should be to see a loan officer. A loan officer can help determine the loan you’ll need for your business. When going to a loan officer, you’ll need a detailed understanding of your business and its projected growth. You’ll also want to have a solid plan of how to use the money you’re requesting and, more importantly, how you plan to pay off the equated monthly payments or EMIs after the end of the moratorium if any.
- Your Credit Score
This is one of the most important factors to take into consideration when looking into loans for your company. Lenders use your credit score between 300 and 850 to determine your ability to repay a loan. Although it’s not likely your credit score will be 800, it’s still important to try to keep it as high as possible. A low credit score can significantly affect your ability to get a loan. One way to do this is to pay your bills on time and to keep your credit utilization as low as possible. There are various ways of doing this. For example, you must make it a point to be punctual with paying your existing EMIs.
- How Long Do You Need the Loan For
The tenure of your loan will significantly affect the terms of your loan. A longer loan term means smaller EMIs while a shorter loan term means higher EMIs. You must check your paying capacity. If you’re taking a large loan and have low paying capacity, your EMIs will have to be stretched over a longer time. However, you will end up paying more interest on a longer loan term while if you cut short the repayment duration, you will substantially save on the interest.
- The Interest Rate
The interest rate on the loan you take out will have the biggest impact on the terms of your loan. If the lender considers you a repayment risk, they will charge you a high rate of interest. Also, a lot will depend on whether you are choosing a fixed interest rate or a floating one. In a fixed interest rate loan, your rate of interest will remain constant regardless of whether they rise or decrease in future. However, a floating interest rate changes according to the changes in the market.
- The Lender’s Risk Concerns
The lender’s risk concerns will significantly impact the terms of your loan. Many loans, including most business loans, come with collateral. Your lender may insist you use some of your assets as collateral to back the loan. If yours is a high-risk case, the bank you are seeking a loan from may impose tougher terms on you than on another person who has, for example, a better credit score or a good financial history with the bank.
- The Size of Your Business
The size of your business will affect the terms of your loan. If you have a small business, you can get a business loan with a lower down payment or a longer repayment period. If you have a large business, the risk factor may force the bank to introduce tougher conditions for the loan.
- The Type of Loan You’re Looking For
This factor will have the biggest impact on the terms of your loan. Loans will be categorized as commercial, SBA, bridge or other types of loans. Many types of commercial loans are available, but some may have better terms than others. For instance, a personal loan may have a completely different set of terms and conditions than a home loan. Understanding which loan type best suits your or your business needs is important.
- Co-signers and Collateral
This is one of the factors that will have a significant impact on the terms of your loan. Co-signing a loan is when one person (the co-signer) is responsible for paying the loan if the borrower doesn’t make the payments. The introduction of a co-signer introduces an added guarantee of repayment. In such cases, lenders may offer relaxed terms and conditions.
Wrapping Up
The factors that can affect the terms of your loan are endless and varied. It’s important to understand what these factors could mean for the terms of your loan before you even apply for one. By understanding these factors, you’ll be better equipped to make the best decision for your company.
If you wish to take a loan at the most favourable terms, you must check out the flexible options provided by financial institutions like Piramal Finance.