Loan questions explained: A quick guide

What is a loan?

A loan is money borrowed from a lender that you must repay with interest over a set term. The lender provides funds upfront; you agree to a schedule of payments that includes principal and interest.

Quick takeaways

• Principal is the amount borrowed.
• Interest is the price of borrowing.
• The term is how long you have to repay.

What are loan terms?

Key terms include principal, interest rate, term length, payment schedule, and how the loan is amortized.

Quick takeaways

• Shorter terms usually have higher monthly payments but lower total interest.
• Longer terms lower monthly payments but can cost more in interest over time.

How is interest rate determined?

Interest rates depend on factors like your credit score, income, existing debt, loan type, and term length. Lenders also consider market rates.

Quick takeaways

• Higher credit score generally means lower rates.
• Securing the loan with collateral can influence rate for some types.

Fixed vs variable rates

Fixed rates stay the same; variable rates can move with market conditions. Your monthly payment may change with a variable rate.

Quick takeaways

• Fixed rates offer payment stability.
• Variable rates can start lower but risk rising costs.

Fees to watch for

Look for origination fees, closing costs, application fees, prepayment penalties, and mandatory insurances. Some lenders roll fees into the loan.

Quick takeaways

• APR includes interest and most fees.
• Compare total upfront costs and total interest.

How to compare loan offers

Compare APR, monthly payment, total cost, fees, terms, and flexibility like early repayment.

Quick takeaways

• APR is the best single metric for comparison.
• Read the loan terms and any penalties.

How to apply for a loan

Prepare ID, income verification, employment details, and consent for a credit check. The lender reviews your info and notifies you of approval.

Quick takeaways

• Have documents ready to speed up approval.
• A pre-qualification can help gauge options.

Repayment considerations

Create a budget, set up autopay if offered, and know your payoff date. If you must miss a payment, contact the lender early to discuss options.

Quick takeaways

• On-time payments build credit and avoid penalties.
• Making extra payments can reduce interest over time.