What are Loans and How Do They Work?

A loan is money you borrow now and pay back later, usually in regular payments with interest.

The lender gives you a lump sum or access to funds, and you agree to repay it under specific terms (amount, time, and cost).

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Key Parts of a Loan

Most loans work around a few basics:

• Principal: The amount you borrow.

• Interest: The cost of borrowing, usually shown as an annual rate.

• Term: How long you have to pay it back (for example, 3 years, 5 years, 25 years).

• Payments: Regular amounts (monthly, bi-weekly, etc.) that include principal and interest.

• Fees: Some loans include extra fees for setup, late payments, or early payoff.

You agree to these terms in a contract before you get the money.

Types of Loans

Common examples include:

• Personal loans: For general purposes like debt consolidation or big expenses.

• Car loans: Specifically for buying a vehicle, often secured by the car.

• Mortgages: Long-term loans used to buy a home.

• Student loans: To help pay for school-related costs.

They all follow the same idea: borrow now, repay later with interest.

How Repayment Works

Once you take a loan:

• You’ll have a payment schedule (like monthly payments).

• Each payment goes toward interest and principal.

• Paying extra or paying off early (if allowed) can reduce the total interest you pay.

Missing payments can lead to fees, higher costs, and damage to your credit, so it’s important to borrow only what you can realistically repay.