Loan Basics

While each loan has its own terms, in the simplest form, a loan is money given to a person or entity for some purpose with the intent that it be repaid with interest. This repayment is reported to the credit bureaus and impacts your credit score. Some loans are "revolving," and, as long as the minimum payment is made each month, they can be used up to their credit limit time and time again. Others are a one-time loan, and, once repayment has finished, it is closed out. Some loans may be secured by collateral, like a vehicle or house, while others are not.

Every loan is different, and ultimately what makes up a loan comes down to the terms and conditions of the contract you sign with your financial institution. Below are some of the common items that make up a loan.

Interest Rate
The interest rate is the amount that is charged, shown as a percentage, for borrowing money. It is paid in addition to the amount that was borrowed.

Term
The term of a loan refers to how long you have to pay it back. This could range anywhere from a handful of months to upwards of 30 years depending on the type of loan. Term limits can vary based on different factors, such as the type of loan you are financing, comfortable monthly payment, and/or interest rate. For instance, some home loans can have a term of 30 years, but that does not mean you cannot have one for 15 years.

Collateral
Collateral is an asset that can be used to secure a loan. It is used to ensure that the lender has a way to get payment for a loan if the borrower defaults. Some of the most common types of collateral are vehicles, houses, and cash. Not all loans have or require collateral. The necessity for collateral typically depends on the type of loan you are getting and your creditworthiness.

Loan Payment
The loan payment is the minimum amount that you signed and agreed to, which is required to be paid on your due date. Due dates are typically set on a monthly schedule. Payments are usually set to a certain dollar amount each month, however some loans, like credit cards, base the minimum payment on the balance owed on the credit line at the end of the month.

Personal Loans
Personal loans are loans that can be used for almost anything you wish. Common uses are emergency expenses, vacations, or weddings. Most personal loans are unsecured, so they don't have any collateral, however in some instances you may be required to have collateral.

Auto Loans
Auto loans are used for purchasing a vehicle. In most instances you are able to borrow the the full value of the vehicle that is being taken as collateral for the loan. If the borrower stops making payments on an auto loan, the lender can begin the repossession process. If the vehicle is repossessed the lender can sell the vehicle to attempt to recoup the funds

Mortgage Loans
A mortgage is used when purchasing a home with that property being used as collateral for the loan. The amount financed typically covers the price of the home, minus the down payment and closing costs. If a borrower defaults on the mortgage, the property can be foreclosed by the lender. Most mortgages are repaid over 10, 15, 20 or 30 years. There are many different types of mortgages or programs that a borrower may qualify for including First Time Home Buyer or VA (Veterans Administration) mortgages.

Home Equity Line of Credit
A Home Equity Line of Credit (HELOC) lets you borrow up to a certain percentage of the equity in your home (the difference in the value of your house and how much you still owe). This money is commonly used to make house repairs or upgrades but can also be used for a variety of other reasons. A HELOC is a revolving line that works similarly to a credit card. You can continue to draw off the line until you reach your credit limit, and make monthly payments to the balance due. As with a mortgage, a HELOC uses your home as collateral. If a borrower defaults on a HELOC, they could be looking at having their home foreclosed by the lender.

Credit Cards
A credit card is a line of credit that allows you the convenience of borrowing money at will, up to your credit limit, when you need to purchase something. The funds that you use are provided by a lender and are required to be paid back, typically with interest. Each month you will get a bill that shows what your total balance due is, as well as your minimum monthly payment due. Not paying your minimum payment each month can result in the credit line being revoked.

Debt Consolidation Loans
A debt consolidation loan combines multiple debts into one single debt. This reduces the number of monthly payments, can often lower the monthly payment amount, as well as the interest rate on your debt. Debt consolidation loans can help save you time and money.

Student Loans
Student loans are offered to people who are looking to further their education. They are designed to help cover the remaining cost of tuition after your grants and scholarships. There are multiple different types of student loans including federal, private, subsidized and unsubsidized. When looking to take out student loans, it is important to find the type that will work best for you.

- Annual Percentage Rate (APR): The cost you pay on a yearly basis to borrow money expressed as a percentage. This includes any fees that are charged.
- Application: A request to borrow funds from a lender.
- Borrower: A person or entity who is using the funds with an agreement to pay the funds back later.
- Co-Borrower: A person who joins the primary borrower in the liability and ownership/use of the funds or asset.
- Co-Signer: A person legally responsible to pay a debt if the borrower does not pay. A co-signer does not receive any of the loan proceeds.
- Debt-to-Income Ratio (DTI): Your total monthly debt payments divided by your gross monthly income. This number is used to help determine the likelihood of a borrower's repayment.
- Default: A failure to make the required payments on debt.
- Down Payment: The cash a borrower pays upfront when borrowing from a lender.
- Equity: The difference between the value of an asset and the debt still owed on that asset.
- Interest: The charge, or cost, for borrowing money from a lender.
- Loan-to-Value (LTV): A comparison of the amount of the money being borrowed to the value of the asset the money is being used for.
- Pre-Approval: A pre-qualification for a loan up to a certain amount that allows a borrower to search for an asset within their price range.
- Principal: The original amount of money that was agreed to be paid back before any interest.
- Refinance: When a borrower takes a current debt and pays it off with a new debt with more favorable terms.