What is a Loan?
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What is a loan?
A loan is a sum of money you borrow from a lender that you return with interest. Loans can be secured or secured or.
Last updated on Jan 11 2022.
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A loan is a sum of money that you borrow through a lender -such as a bank, credit union or online lender — or a person, like an extended family member and repay in full at the end of the term, usually with interest.
All loans have similar attributes. There are different kinds of loans dependent on the purpose you intend to use them for.
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How do loans function?
They typically have four major aspects: principal the loan, interest, an installment payment and term. Knowing these four features will help you decide if a loan is suitable for your needs and how affordable.
Principal: This is the amount of money you get from a lender. It could be $500,000 to purchase the purchase of a new home or $500 for car repair.
Interest: The interest rate is the cost associated with an loan which is the amount you must pay back in addition to the principal. Lenders determine your interest rate according to a variety of factors including your credit score, the kind of loan and the amount of time it will take to pay back the loan.
The interest rate is different from the , or APR which also includes other costs like upfront costs.
Installment payments: Loans are typically repayable on a regular basis generally monthly to the lender. The monthly installment is usually a fixed amount.
Term A term is the loan term determines the length of time it takes to pay back the loan in full. Based on the kind of loan, the term can range from a few weeks up to several decades.
Different types of loans
The loans can be classified into two broad categories that include secured loans and unsecured loans.
Secured loans
Examples of a loan for a mortgage or an auto loan.
In most cases, the lender makes use of a tangible asset, like your house or vehicle for security if you cannot repay the loan according to the terms agreed. The lender calculates your interest rate on the property and also on your credit score and credit history. Secured loans generally offer lower rates of interest than unsecure loans.
Unsecured loans
Examples of a student loan for education or an individual loan or payday loans. payday loan.
The price on credit ratings, credit history, income, and any existing debt. If you fail to repay the loan as agreed the lender won’t be able to take all of your assets however, it may declare the default to credit bureaus, which will hurt your credit score and your ability to get another loan in the future.
Unsecured loans typically come with higher interest rates as well as smaller loan amount in comparison to secured loans.
Here’s a quick overview of the various types of loans along with their terms and rates of interest.
The type of loan
A typical interest rate
The most common words
2.5% to 3.5%.
15 or 30 years.
3% to 20 percent.
Between 2 and 6 years old.
1% to 15%.
10 years.
From 6% to 36%.
Between 2 and 7 years old.
400%.
2 to 4 weeks.
Prepare in case of a loan application
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About the writer: Amrita Jayakumar is a former writer for NerdWallet. She has previously worked for The Washington Post and the Miami Herald.
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