There are so many reasons people take loans. In addition, there are several types of loans: personal loans, student loans, mortgage loans, auto loans, e.t.c. Before borrowing any money, however, it’s crucial to know the type of loan that’s best suited for your needs.
What is a loan, and how does it work?
In finance, a loan is an amount of money you borrow for specific reasons and agree to return within a time frame, most times with interest. The amount you can borrow and the interest rate will depend on several things, like your credit score, financial assets, income, and how long you will pay it back.
Depending on the type of loan, borrowers may be required to provide a downpayment, i.e., an amount equal to a certain percentage of the borrowed amount.
Why is interest on loans important?
Lenders demand that borrowers pay interest for several vital reasons. First, when people lend money, these lenders may no longer be able to use it to fund their purchases or projects when they need to. In other words, these interests make up for this inconvenience. In addition, interest has a vital role it plays in the economy. It is used as an instrument in economic policy. For example, the interest rate may be set to achieve monetary policy objectives like price stability and stable inflation.
What to consider before applying for a loan
Before taking a loan, especially for individuals, there are some things you need to consider;
- Purpose for the loan; it is important first to ask, “Why am I taking a loan”?, and “Are there alternatives to getting a loan?”
- Income; whatever loan you decide to apply for, you must first check if your income can accommodate that loan.
- Credit score and credit history; a person that has a good credit score and history can show the lender that he can make repayments on time. Therefore, the higher the credit score, the higher the individual’s chances of getting approved for a loan. In addition, with an excellent credit score, an individual also has a better chance of getting more favorable terms.
Types of loans
Loans are sums of money that people or businesses borrow from a lender. There are three main types of loans: unsecured, secured, conventional, and open-end and closed-end. Regardless of the type of loan that one chooses to apply for, there are a few factors that he should first assess, such as his income, expenses, and credit rating.
- Secured and unsecured; a secured loan is often backed by collateral. For instance, some financial institutions require borrowers to submit documentation to show ownership of an asset until they repay the loan. These assets can be stocks, bonds, or personal property. On the other hand, an unsecured loan is an opposite. In this case, the borrower does not need to show any assets.
- Open-end and close-end; open-end is a pre-approved loan granted by financial institutions to a borrower which can be used repeatedly. With open-end loans, like credit cards, once the borrower has started to pay back the balance, they can choose to take out the funds again—meaning it is a revolving loan. In contrast, closed-end loans are loans given with a specified date that the loan and interest must be repaid. In this case, individuals cannot borrow again until they have repaid.
- Conventional loans; these types of loans are mortgage loans that are not insured by any government agency.
What to know about loan agreements
A loan agreement is very important as it contains all the details of the loan, like the amount, interest rate, and time frame for repayment. Here are some things you need to know about loan agreements;
- The basic information required; this part will contain the basic information used to identify the parties that agree to the term.
- The specific loan details; in this section, the details are the amount that is being borrowed, the interest rate, how the loan will be paid, and the time frame for repayment.
How you can choose the best loan possible
Which is the best kind of loan for you? The answer depends on your situation and needs. Are you comfortable with the interest rate and repayment terms? When you Weigh up these factors, it will be easier for you to determine which is right for you. And if you think that there is a possibility you may be unable to pay back, it is in your best interest not to borrow.
Federal Employees’ Group Life Insurance (FEGLI) is a federal government-sponsored group team life insurance policy available to federal employees who are either full-time or part-time permanent employees. The program is also known as FEGLI, and it was started by the federal government in 1954.
Federal workers, federal retirees – provided they satisfy the criteria to keep their insurance coverage in retirement – and their family members can take use of the benefits offered by FEGLI.
Employees of the federal government can get term life insurance at group rates through payroll deductions accessible through their agency.
Who is eligible for being part of the FEGLI program?
It is quite likely that you will be qualified for the FEGLI program if you work for the federal government. Law and regulation, on the other hand, make exceptions to this general rule. If you’re eligible, it will be determined by your government agency.
Types of coverage under FEGLI
The FEGLI program offers two levels of insurance: Basic and Optional. Each form of insurance is completely voluntary, and it can be terminated at any moment. It’s crucial to understand that FEGLI doesn’t create cash or loan value. Its purpose is to provide instant financial protection in the case of death.
Basic life insurance
Because most federal employees are qualified for the FEGLI program, they are immediately enrolled in the Basic Life Insurance program. For as long as coverage remains in effect, payroll deductions for premiums will continue.
Basic Insurance offers coverage equivalent to your yearly basic salary, rounded up to the closest $1,000, plus an extra $2,000.
You, as a federal employee, and the federal government split the cost of Basic Insurance coverage. It costs you 2/3 of the whole premium cost, while the government pays 1/3. It does not matter how old you are when it comes to paying your Basic premium because new rates are set on a regular basis.
For Federal employees under the age of 35, Extra Benefit coverage is included at no additional expense. Up to the age of 35, the Basic insurance policy’s coverage is doubled by the Extra Benefit.
Extra Benefit coverage begins to drop by 10% yearly beginning on your 36th birthday and continues until you reach the age of 45, at which point it is completely terminated, leaving only your Basic Insurance amount.
Optional life insurance
Optional life insurance is the second type of coverage offered by the FEGLI program. Basic life insurance is required before you may select any of the other three forms of insurance. To enroll in optional life insurance, you must take action, unlike with basic enrollment. Within 31 days of becoming eligible, you can decide on the types of optional insurance you want to carry. The cost of any optional insurance is entirely borne by you; the government makes no contribution to these costs.
Optional life insurance comes in three varieties:
- Option A, or Standard Optional Insurance, adds $10,000 to your policy. The price is determined by the age groups. The cost is 0.30 cents if you are under the age of 35. When you approach a new age bracket, the price rises. The age groups are 35, 40, 45, 50, 55, 60, 65, and 70. During the pay period in which your birthday falls, you are regarded to have reached the next age band. The amount withheld from your salary must be prorated and adjusted to the closest cent if you are paid on a schedule other than biweekly.
- Option B, or Additional Optional Insurance – this coverage is available in multiples of your yearly base rate of pay of 1, 2, 3, 4, or 5. It excludes the additional $2,000 for Basic Insurance. The price is also determined by the age groups. Option B coverage follows the same age groups as Option A coverage. The fee is 0.03 cents for $1,000 of coverage monthly if you are under the age of 35. If you are paid on a different schedule than biweekly, the amount deducted from your salary must be prorated and adjusted to the nearest tenth of a cent.
- Option C, also known as Family Optional Insurance, covers your spouse and qualified dependent children. All eligible family members are immediately insured if you choose Option C. You can choose from 1, 2, 3, 4, or 5 coverage multiples. For a spouse, each multiple equals $5,000, and for each qualifying dependent child, each multiple equals $2,500.
Accidental Death and Dismemberment Benefits
As a part of Basic and Option A Insurance, you’ll get accidental death and dismemberment coverage. If a participant is injured in an accident and dies or loses a limb or their sight within 90 days of the incident, benefits are payable. The amount of the accidental dismemberment payout is determined by the participant’s insurance coverage at the time of the accident and the degree of the dismemberment that was lost.
Waiver/Cancellation of insurance:
Unless they submit a waiver, employees are automatically insured under Basic Insurance. Insurance coverage, both basic and optional, can be discontinued at any moment. Optional coverage is waived or canceled when Basic insurance is waived or canceled. Optional coverage, on the other hand, can be discontinued without affecting Basic coverage. Employees can terminate or reduce coverage at any time by filling out the SF 2817 form.
Summary
Life insurance is a no-brainer throughout our lifetimes, making FEGLI an excellent insurance choice for a large number of federal employees. We’ve gone over the basics of the FEGLI program, but there are some other factors to consider when deciding which of the two forms of insurance you should use as a federal employee. Check out FEGLI’s booklets for additional information.