A loan is money
you borrow for a specific reason and agree to repay at a later date (usually
with interest). To better understand loans, here are some common terms
Secured vs. Unsecured
Secured loans require you to give something of
value to the lender, so that if you do not repay the lender, the lender can
use that item to pay your debt. A secured loan is a great way to build your credit
A common example of a secured loan is a mortgage loan in which your
home is the item of value. If you do not repay your loan on time, the
lender can take away your home.
Unsecured loans do not require you to give
anything of value to the lender. The lender gives you money that you
promise to repay.
A common unsecured loan is a student loan. A lender
would give you money for school and you promise to repay the lender by a
certain time along with interest and fees.
Another popular unsecured loan is a credit card. You are allowed
to use it to pay for items now and need to pay back the balance by the end
of your bill cycle.
Loan Interest, Term and Fees
Interest - The amount a borrower pays to a
lender for borrowing money, it is usually expressed as a percentage.
For example, if Adam borrows $200 from Stanley with an interest rate of
10%, Adam needs to repay Stanley $220 ($20 of which is interest).
Variable Rate - An interest that may
change, usually due to market conditions or your credit rating. Lenders
must tell you what the interest rate is for your loan and, depending upon your
agreement with the lender, the rate can remain the same (fixed rate) or change
over time (variable rate).
For example, one year your interest rate is 15%. Because you've
paid your bills on time, the next year, your credit card company may lower
the rate to 14%.
Term - The term of the loan refers to the number
of payments and amount of time you need to repay the loan. A longer term
loan may offer lower monthly payments, but over time, the total amount you
repay is higher.
Fees - Loans often have fees that go along with
them. These fees may be charged when you receive the money (e.g.,
sign-up fees) or if you miss a payment (e.g., late fees).