Now that summer is over, and some of our hard-earned cash was used to soak in all the sun and fun, we may find ourselves in need of cash for a major purchase. Here are the loan basics:
A loan is basically borrowed money. The lender, typically a bank, credit union or even a family member, has cash on-hand and is willing to lend you, the borrower, a specified amount with specified terms. These terms refer to the interest rate, the loan term or length, and the security component.
The interest rate is the lender’s charge for borrowing money. It can either be fixed (i.e. static, never changes) or variable (i.e. adjustable, changes). Along with paying the principal (i.e. the borrowed amount) back, interest will be paid to the lender as well.
The loan term is the length of the loan or the amount of time extended to the borrower to pay back the loan. Typically, longer loan terms lead to higher interest rates but lower payments, and shorter loan terms lead to lower interest rates but higher payments.
Regarding the security component, the loan may either be secured or unsecured. Secured means the loan is backed (i.e. secured) by some type of asset usually owned by the borrower. This is also known as collateral. This is less risky for the lender because it ensures the lender will get his/her share back in case the borrower fails to pay the lender back entirely. In exchange for security, the lender will typically offer a lower interest rate to the borrower of a secured loan. If a loan is unsecured, there is no collateral guaranteed to the lender if the loan goes unpaid which is risker for the lender and typically correlates to a higher interest rate. If a borrower does not have collateral, he/she may usually have a cosigner, like a parent or guardian, who promises to pay the loan back if the borrower does not.
There’s a plethora of loans available on the market today. However, most of them will abide by these general concepts. As always, ensure you do your homework or consult with a financial professional before signing the dotted line. Loans can be a great way to get off of your feet, help with major expenses or endeavors, and even assist you in building your credit when properly applied. Happy borrowing!