The basics of loans

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

MichaelNow it’s time to talk about another common way of borrowing money: loans.

 

LuisMillions 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.

MichaelWith 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.

LuisWhen 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.
MichaelHow 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.

LuisAnd one more thing: in addition to the principal and the interest, the lender may also charge you fees for giving you the loan.

Remember these key points about loans.

  • Loans = installment credit
  • Receive money, repay monthly
  • Lender charges interest & fees
  • Your costs depend on how much you borrow, the interest rate, and the term (the time you take to repay)

 
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