The basics of loans

Want to purchase a high-priced item? You may need to borrow money. Your coaches explain the fundamentals of loans.


Now it’s time to talk about another common way of borrowing money: loans. Image Description
Millions of people apply for loans to pay for high-priced items like cars, home improvements, and college education. Home mortgages are also a type of loan. Image Description
With a loan, you receive all the money the lender has approved for you in one lump sum. Then, to pay the lender back, you make equal monthly payments, called installments, for a fixed period of time, until the loan is paid off. This is called a long-term loan or an installment loan. Image Description
When you borrow money from a bank or other lender, keep in mind that there are costs involved. Lending money is a business. The lender – whether it’s a bank, a store, or a car dealer – makes money by charging you an extra amount over and above the amount of the loan itself. The amount of the loan is called the principal, and the extra amount they charge you to borrow the money is called interest. Image Description
How much interest you’ll pay for your loan depends on three main factors: First, it will depend on how much you’re borrowing: the principal. Second, your costs will depend on the interest rate. And the third factor affecting your interest payments is how long it will take you to pay the money back. This is known as the term of the loan. Image Description
And one more thing: in addition to the principal and the interest, the lender may also charge you fees for giving you the loan. Image Description

• Loans = installment credit • Receive money, repay monthly • Lender charges interest & fees • Your costs depend on: • How much you borrow • Interest rate • Term: Time you take to repay
For more about how interest rates and terms affect the cost of credit, click Next.
The basics of loans Compare the terms Compare interest rates The loan process Choose a lender the smart way Warning signs to watch out for You’re at risk Scenario: Choosing a lender If the lender says no… Scenario: Managing a loan