What are one-year loans?

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A one-year loan is a financing or loan program that is structured to be repaid at or before the end of one calendar year from the date the loan was issued. A one-year loan is often associated with personal installment loans, but it is also sometimes used in the mortgage industry to refer to one-year adjustable rate mortgage (ARM) loans.

A one-year personal loan may be issued as a secured loan or as an unsecured loan, depending on the lender and available programs. A secured loan is a loan where an asset with some cash or market value is pledged to the lender as collateral against a possible default. If a borrower misses payments on a secured loan and cannot make the repayment arrangements, the lender can seize the pledged asset and use it to satisfy the outstanding loan obligation. Typical examples of secured one-year loans for consumers may include auto title loans and certain pawn shop loans.

An unsecured loan is a type of financing that requires no pledged asset as part of the loan agreement. The most common example of unsecured one-year loans is the signature loan.

Credit and approval requirements for a one-year loan

All consumer loans, regardless of length of term, typically require a review of the applicant’s credit history before the loan application is fully approved and funded. However, many one-year consumer loans are available to individuals with less-than-perfect credit.

Most one-year loans do require evidence of employment by way of a recent paycheck stub showing current and year-to-date income or a bank statement showing deposits. Copies of W2s or tax returns may also be required, especially when the borrower is self-employed or is an owner of an existing business.

As with the typical consumer loan, the one-year signature, personal or automobile title loan is governed by the loan agreement, which clearly outlines the loan amount, the interest rate, the regular payment and the payment schedule. The loan agreement will also define the steps a lender may take should the loan go into default.

So how does a one-year loan differ from a 90-day, six-month or three-year loan?

The repayment period actually has a big impact on the payments on and cost for the loan. Assuming that the interest rate and loan amount is the same, a longer term will mean lower monthly payments. The borrower will have more time to repay, so the repayment amounts are stretched out and lowered with longer term loans.

Unfortunately, the other side of this equation is that longer term loans incur higher costs. Even if the interest rates remain the same, the interest charges will be paid for a longer term. Each additional day, week or month added to the term means more interest charges that the borrower will have to pay for the loan.

For some borrowers, the one-year loan may provide a good balance, as it stretches out the payment a little longer than very short-term loans (like payday or pawn shop loans). But the borrower will be obligated to pay off the loan within one year – and only have to pay one year of interest charges.

Disclaimer: NetCredit is a direct personal loan provider and does not provide financial advice, nor does it vouch for any vendor or service mentioned on our NetCredit personal finance blog or online consumer loan glossary. Always research and perform due diligence on any service provider or vendor before deciding to use them, and we recommend that you speak with a financial advisor regarding all decisions that will affect your finances.

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