What is a Loan?

A loan is basically a sum of money that you borrow from someone, like a friend or family member, or a financial intuition like an online lender or credit union. In this article, we will be talking briefly about a loan that you obtain from someplace like your bank. For instance, you just got a new job, and it requires you to drive out of town. Your old job was right down the street, you could walk or ride your bike, or even call a taxi in bad weather. This new job is over 20 miles away, and a taxi fare could prove to be very expensive over time. So maybe it’s time to get a car. You go down to your bank, and discuss the terms of an auto-loan with the loan officer, and within no time at all, you are pre-approved for a $15000 car off of your credit history. This are many different types of loans, that have different perks, policies, requirements, etc. This loan, as mentioned, is an auto-loan. A lender who has the financial means, will lend someone in need of money, the funds to be able to afford something. In this case, a car. The terms are different for every loan, but the majority of them always include interest. Interest is how the lender makes money off of you, in return for you borrowing money off them. Just like a credit card, let me explain how this work. Let’s say you borrow $15000 from your bank, and your interest rate was marked at 15%, with a payback plan of 5 years. This means in total, over the course of your monthly payments, you will pay back about $6000 in just interest fees. This means that the lender basically charged you $6000 to loan you $15000. Granted they don’t make this money overnight. The interest is added right into your monthly payments. So, for this scenario, at 5 years, your projected payback would be $385 a month, for a total of 60 payments. Your total owed would be just over $21000. Why would you do this you may ask yourself? Simple, you most likely don’t have the cash laying around to purchase a home. Let’s just assume the home in question is over $200k. If you have outstanding credit, you could get this money loaned to you with a down payment of course. The payback on a loan this size would be a lot more than the 5-year auto loan however, when it comes to home and business loans, typically you are looking to payback the principal cost in up to 30 years. It’s very important to research and review the loan before signing off on it. It is very important, that if you do not understand this, that you reach out to a loan officer, or someone at your financial institution to instruct you accordingly. Some people have been stuck with paying some outlandish interest rates, sometimes this could be 50 % of the loan or more in some cases. When dealing with loans and mortgages, be sure to review and read over them carefully. There’s no shame in reading it twice just to be sure. Borrowing hundreds, thousands or even more money, could prove disastrous if you don’t have the financial stability to pay it back. The single, most-important thing to remember when it comes down to applying for loans is understanding your interest rate. That cannot be stressed enough. Another thing to be weary of, is make sure you don’t apply for a bunch of loans, as it will straight up destroy your credit score. Every time you attempt to open a loan, whether you get it or not, will cause a bit of a hit to your credit score. When you do this responsibly, it really doesn’t do any serious damage, and will heal itself over a little bit of time. If you start applying like mad within the course of a year, you could find yourself doing some pretty heft damage to that credit score of yours. Stay smart, and it never hurts to ask an expert for some advice. There are a lot of people out there that would exercise that in hindsight after making some pretty questionable credit moves.