Financial Growth Series: What You Should Know About Loans

Next up in this series is a little information on loans and some of the things that come along with loans. Be very careful when dealing with your fiances where you would have to repay a debt owed, especially when you are building, correcting and/or maintaining good credit.

WHAT IS A LOAN?

In finance, a loan is the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations etc. The recipient incurs a debt, and is usually liable to pay interest on that debt until it is repaid, and also to repay the principal amount borrowed. The terms of the loan determine what that interest rate will be, how long the borrower has to repay the money, and sometimes place additional stipulations on the funds including how the proceeds are used.

WHAT CAN YOU USE A LOAN FOR?

Loans can be issued for any purpose. Sometimes, people borrow to invest in something (or themselves) such as loan to start a business, buy a house or go to school. Other loans may cover personal expenses that come up in life, such as medical expenses, a new car or even a vacation. However, just because you can borrow for any purpose doesn’t mean it’s a good idea.

WHAT IS AN INTEREST RATE?

An interest rate is a number that describes how much interest will be paid on a loan (or how much you’ll earn on interest-bearing deposits). Rates are usually quoted as an annual rate, so you can figure out how much interest will be due on any amount of money. … Some banks offer higher interest rates than others. Most loan payments are structured so that each payment covers the interest charged on the loan for the period, the interest due, as well as reduces the principal balance of the loan. Interest due is a component of the total loan payment.

WHAT IS APR?

The term annual percentage rate of charge is the interest rate for a whole year, rather than just a monthly fee/rate, as applied on a loan, mortgage loan, credit card, etc. It is a finance charge expressed as an annual rate. The APR is a broader measure of the cost to you of borrowing money since it reflects not only the interest rate but also the fees that you have to pay to get the loan.

SECURE LOAN:

A secured loan is a loan backed by collateral financial assets you own, like a home or a car that can be used as payment to the lender if you don’t back the loan. The idea behind a secured loan is a basic one. Lenders accept collateral against a secured loan to incentive borrowers to repay the loan on time. After all, the prospect of losing your home or car is a powerful motivator to pay back the loan, and avoid repossession or foreclosure.

PERSONAL LOANS:

Personal loans are known as “unsecured” debt because they are not backed by collateral, such as your home or car, as is the case with a mortgage or auto loan, respectively. Lenders will use your credit score to help determine whether to give you a personal loan and at what interest rate.