What is a loan?
A loan is when someone gives money to another person in exchange for future repayment of that money along with interest.
For example, if to pay for your college education you take out a loan of $50,000 at an interest rate of 5% and a term of ten years, over the ten years, you will end up paying back the $50,000 along with the interest.
Although many different kinds of loans are available, here are the ones you will most commonly encounter:
Types of Loans
|Type of Loan||Description|
|Student Loans||Offered to college students and their families to help cover the costs of higher education|
|Mortgages||Loans given by banks to help people buy homes they can't pay for up front|
|Auto Loans||Similar to mortgages, auto loans can help people pay for cars|
|Personal Loans||Can be used for personal expenses, such as credit card debt, and don't have a designated purpose|
|Small-Business Loans||Given to entrepreneurs to help them start or expand their business|
Secured vs. unsecured loans
- Backed by an asset, such as a car, house, or something else of value (collateral)
- Usually have a lower interest rate than an unsecured loan
- Lender holds the title or deed to the collateral until the loan is repaid
- Not backed by an asset (most often a personal loan)
- Usually have a higher interest rate than a secured loan
- Most have a fixed term and a fixed interest rate
Calculator: How much will you have at retirement?
Terms to know
Borrower—the person who take the money from the lender
Lender—the person who gives the money to the borrower
Interest Rate—the percent of a loan charged by the lender; the borrower has to pay back the interest along with the amount borrowed
Term—period of time over which you have to repay the loan
- The New York Attorney General’s office has been cracking down on lenders who have been charging exorbitant interest rates. These lenders are violating New York’s usury (lending money at unreasonably high interest rates) laws by charging interest rates ranging from 89% to more than 355%.
- Thirty-eight states allow small, short-term loans, known as payday loans (small amounts of money lent at very high interest rates). Rates on these loans can range from 300% to more than 1,000%!