July 18, 2024

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Loan Basics

Are you looking to buy something that might be just out of reach? Is there something on your mind that you need some extra money for, such as a home renovation? If so, you might want to look into the possibility of borrowing money from a bank or other lending institution. This article will go into the loan basics that you should know prior to actually borrowing. loan basics

Loan Basics

Loans are a common way of borrowing money for people looking to purchase big-ticket items such as cars or homes (in the form of home mortgages), or to fund things like home improvements or college educations.

Receiving a Loan

When receiving a loan whether it be a mortgage or a kitchen remodel loan, a lender will provide you with all of the money that you have been approved for a lump sum. Once you’ve received the money, a monthly payment structure will be negotiated with the lender. Each month, you will pay back a portion of the loan in what is called installments over a fixed period of time until you’ve repaid the entirety of the loan. Lenders refer to this as a long-term loan.

However, when you are considering a loan, remember that there will be costs involved when you are borrowing money from banks and other lenders. This is how the lender makes money on loaning money to people. After all, it is a business.

The lender, whether it is a bank or some other entity, will charge an extra amount above the value of the loan. The amount of money that you have borrowed is referred to as the principal of the loan by the bank. Any extra money that the bank charges to lend the money to you is the interest.

There are a number of factors that decide the amount of interest that a lender will charge you, but there are three main ones. Those factors are:

  • How much money you are borrowing: The interest charged will be a percentage of the amount you borrowed over the life of the loan. Borrowing more money for things such as a pool or more means paying more in interest.
  • The interest rate: The lender will offer an interest rate to be added to the loan. This percentage will also be added to the life of the loan and you will make payments to it each month as you make payments to the principal.
  • The term of the loan: The length of the loan also impacts the amount of interest that you will be charged. Interest is spread over the life of the loan. This means that if your loan has a longer-term, there are more monthly payments for the interest to be applied to. This will also mean a higher interest rate.

One more thing to remember when considering borrowing money is that the lender may charge other fees beyond interest in return for providing the money to you. These fees vary by lender.

Bottom Line 

These are only the loan basics of borrowing money from a lender. The process to acquire a loan isn’t a short one and you will need to watch out for warning signs and learn how to pick the right lender. You can also check with your accountant to ensure that you’re able to afford certain loans. However, the pros at Tax Day Tea Party state that with the basics down, you will be on your way to getting that big purchase that you’ve always wanted. You can reach out to us if you have any further questions.