A loan is a way for one person to give money to another person. As a borrower, you ask the lender for money, which you will have to pay back later. This service costs money, which is called interest or the annual percentage rate (APR).
Installment loans are loans that are paid back over time in equal monthly payments. Installment loans come at a cost. This includes both the annual percentage rate (APR) and the finance charge. Installment loans can be used to buy cars, furniture, computers, or home appliances. Compare loans with fixed rates, where the interest rate stays the same for the whole loan term, to loans with variable rates, where the interest rate can change during the loan term.
Secured loans mean that the person taking out the loan puts up something as a guarantee, or collateral. If a loan is not paid back in cash as agreed, the borrower can use this as a way to pay back the loan. For example, a home mortgage is a secured loan because the bank lends most of the home's purchase price but keeps a lien on the home as long as the loan is still in effect. Unsecured loans, like credit cards, are loans that don't have anything to back them up. Unsecured loans carry a lot more risk for the lender because they have nothing to back them up. This is usually reflected in a higher interest rate.
You can rent an item from a Rent-to-Own service for a certain amount of time in exchange for weekly or monthly payments. Since these deals are not loans, there is no interest to pay. But you usually pay two to five times as much as you would in a store. For example, a TV costs $1,500 at an electronics store. A nearby rent-to-own store has the same TV for $55 every other week over 52 weeks to pay for it. The total cost of the TV from the rent-to-own services is $2,860 if you multiply 52 weeks times $55 payments. If you don't make a payment on time, you could lose the item and all the money you've already paid for it.
Payday loans are cash advances that you get in exchange for a check from your bank account. Your check is held until the next time you get paid, and then it is cashed. A typical payment for these loans is between $15 and $35 for every $100 you borrow. This may not seem like a lot of money, but let's say you agree to pay back a $200 loan with $260 in two weeks. You have to pay $60 in interest, which is the same as 782 percent per year.
TIP: Compare fees and interest rates before you take out a loan. Make sure you know if the interest rate can change during the loan's term. Don't forget that you don't have to use payday loans or rent-to-own services. Your community group, bank, or credit union may be able to give you small, short-term loans at rates that are more affordable. You might save money if you pay for a pricey item in three or four payments. Look around before you buy something, and never feel like you have to.
