Understanding how loans work can save first-time borrowers a lot of stress and make it easier to get a loan. This article will talk about some of the basics of loans.
A consumer loan is when a bank gives you money and you promise to pay it back. Most payments for loans include both the principal and the interest.
The amount you borrowed is called the principle. Interest is the cost of borrowing money, and it's usually shown as a percentage.
In a loan with only interest, the interest is paid off before the principal. This is important to know because many mortgages are only loans for interest. When you get this kind of loan, the lender can make more money on the loan faster, and in exchange, they can offer you lower interest rates.
Borrowers should know that during the first years of an interest-only mortgage, the whole monthly payment goes toward interest. Because of this, the amount of the loan that was borrowed will not go down. In some situations, the first interest-only payments are less than the payments on the principal. This lets the borrower, who thinks he or she will make more money over time, get a bigger loan.
Fixed-Interest Rates vs. Variable-Interest Rates
Aside from interest-only loans, you might also see offers for loans with variable or fixed rates. Most credit cards either use variable rates or fixed rates to figure out the interest.
Variable rate loans are based on the prime lending rate, and then an extra percentage of interest is added so that the lender can make a profit. When the Federal Reserve raises interest rates, your bank will also raise your interest rates. If the prime lending rate is low, loans and credit cards with variable rates can be a better deal than loans with fixed rates.
Fixed-rate loans and credit cards give you interest rates that you can count on and that don't change. The fixed rate percentage of the loan you took out will tell you how much you have to pay each month. This gives people more peace of mind because they don't have to worry about their monthly bill going up all of a sudden.
Everyone who borrows money should know that variable rates are not the same as teaser rates. Teaser rates are only good for a short time, usually between three and six months. After that time, the rate will go up, and so will your monthly payment.
Building a good credit history is one of the most important parts of getting a loan. If you don't pay your monthly bills on time or don't pay them at all, you'll get a bad credit score quickly. These things are usually reported to the three big credit reporting agencies, and this information will stay on your credit history record for years to come. If you have to get a loan, make sure you can pay it back on time every month.
If you have any questions about your loan or the interest you are being charged, ask the credit person to explain it to you in detail. They don't mind doing this. As a general rule, try to keep your non-mortgage debt payments to less than 10-15% of what you bring home each month.
