A Little Lesson on Loans
The opportunity to spend money is everywhere. There is no shortage of places that will take your cash. In fact, to keep the money flowing out of your wallet, banks and merchants continually come up with easier ways for you to spend it.
But when it comes to borrowing money, suddenly the cash pipeline doesn't operate so smoothly. Money becomes a more complex issue with documents and terminology that practically require you to have both an MBA and Law degree to fully understand.
Before you get dazed by the paperwork and lost in the legalese of loan products, here is a quick lesson on loans.
1) The Basics
When you get a loan, you are borrowing money with a promise to pay back the original amount (principal) plus an extra amount as a fee (interest) for the privilege of borrowing. The amount you pay in interest is normally a percentage of the loan amount -- the interest rate.
Example: If you borrow $100 with an interest rate of 10%, you will pay back $110. That consists of the $100 principal plus $10 interest.
2) Loan Categories
From a broad perspective, loans fall under one of two categories: a) Installment loans and b) Revolving Credit loans.
b) Revolving Credit loan: Revolving Credit (also called Revolving Line of Credit or Credit Line) is a loan where a lender allows someone to borrow money up to a specific limit, called the credit limit, whenever money is needed. The borrower draws down the credit limit every time an amount is borrowed. The borrower can use as much of the credit as he or she wants. When a repayment is made, the available credit rises by the paid amount.
Example: Borrower gets a credit limit of $1000. $100 of the credit is used to buy merchandise. The credit limit now decreases by $100 to $900. A day later, the borrower decides to borrow another $100 decreasing the credit limit to $800. Next month, borrower pays back the $200 plus interest and the credit limit goes back to the full $1000.
A loan with a fixed interest rate means that the interest you pay stays the same throughout the life of the loan.
There you have it. You just completed your lesson on loans. Now that you have a grasp of the basics of loans, you will be better prepared to understand the minute details of the loan that you need.