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.

a) Installment loan: The installment loan is probably what most people think of when talking about a loan. Money is borrowed from the bank in one lump sum and normally paid back in installments, or increments, over a set period of time. The sum paid back can include both the principal plus interest or the payments may contain interest only with the principal being paid all at once in the last loan installment, known as a balloon payment.

Loans that fall under this category include mortgages, personal loans, and auto 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.

Loans that fall under this category include credit cards, home equity line of credit (HELOC), and business lines of credit.

3) Rates
As you already learned, the interest that you pay is calculated as a percentage of the principal amount. Some loans have a fixed interest rate while others have an adjustable rate of interest.

A loan with a fixed interest rate means that the interest you pay stays the same throughout the life of the loan.

The adjustable rate loan, on the other hand, has an interest rate that can fluctuate from period to period. That means a borrower can expect to pay more or less interest as the rate fluctuates. The rate's movement is tied to indexes that track a basket of interest bearing investments. As the interest rates of the index moves up or down, the interest rate on your loan is adjusted accordingly.

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.

Jon Galanty is a financial writer for eMoneyCentral.com. Visit http://www.emoneycentral.com to find out more about loans and to get other great money tips.

---

Bad Credit Personal Loan - A Pay Day Loan May Be Your Best Option, No Credit Check

If you have bad credit, have an emergency and need... Read More

Personal Loans - To Make A Personalized Financial Agenda

The phrase 'tailor-made' ought to be made for personal loans.... Read More

Loan Basics

There is more than one type of loan. Depending upon... Read More

Secured Loans - UK Overview

Borrowing money has become more and more popular in the... Read More

Secured Business Loans ? Equipping Your Business Blueprint With Concrete Groundwork

Somebody once said, 'Business is not financial science; it's about... Read More

Why Starve Your Needs When Payday Loans are there to Gratify Them

The long awaited paycheque is finally here. However, the reverie... Read More

6 Key Points to Evaluate Online Lenders

The internet is teeming with lenders who are vying for... Read More

Lawsuit Loans - Caveat Emptor!

If you have been injured in an accident it is... Read More

What is Credit Insurance?

Are you wondering what is credit insurance? Very simply, credit... Read More

Ways to Find a Cheap Loan

If you're in the process of trying to find a... Read More

Seven Tips For Credit-Enhancing Your Business Loan

What are the avenues available to businesses with weak credit... Read More

Shopping for a Personal Loan

Most Internet users are now extremely comfortable using the Internet... Read More

Payday Loan and Cash Advance Lenders Online - How To Compare Them

When searching for a payday loan company online to get... Read More

What is a Secured Personal Loan?

A secured personal loan is the generic term for a... Read More

No Faxing Cash Advance Loans - 3 Reasons to Use A No Fax Payday Loan Company

No fax payday loan companies save you time with your... Read More

A Look at Common Types of Loans

People sometimes wonder about common types of loans, especially with... Read More

What are Secured Loans?

Secured loans are one of the most popular personal loans... Read More

Filling Out The Loan Application

1. Property information. The application begins with a section on... Read More

A Renter in Debt? Take Out a Bad Credit Personal Loan

On average, homeowner households earn 95% more than renting households... Read More

Guide to Loan Terms

Listed below is a guide to loan terms. It is... Read More

Benefits of an Unsecured Loan

Listed below are some of the benefits of an unsecured... Read More

Student Loan Limits Not Keeping Up with Tuition Rates

As tuition rates at many colleges continues to rise, the... Read More

Payday Loans ? The Legal Loan Sharking Industry

Laws have been created to protect people against "Loan Shark"... Read More

No Faxing Hassle-Free Payday Loans Can Be Yours

No faxing payday loans are the wave of the future.... Read More

Why Choose an Unsecured Loan?

Why choose an unsecured loan? An unsecured loan can be... Read More

UK Student Loans Explained

Student loans seem to be the only feasible way out... Read More

Secured Loans Information

A secured loan is a personal loan which is generally... Read More

Should You Get A Pay Day Loan?

Whether you have good credit, bad credit or no credit,... Read More

A Brief Look at the Origins of Lending

When trying to discover the origins of lending you might... Read More

Getting Good Value Personal Loans

Over recent years, personal loans have become a popular solution... Read More

Loan Officer Marketing - The Power of Positioning

How do you build a marketing strategy that can have... Read More

Personal Loan 101- What You Absolutely Need to Know

Daughter's marriage or her studies? Son's Ambition? Want a House... Read More

A General Discussion about Unsecured Personal Loans in the UK Financial Market

Personal loans are offered by lenders such as banks and... Read More