What does it take to get money? More money. When you borrow, you have to pay back the amount you borrowed plus interest. You may also have to pay fees.
Costs are a key part of understanding how loans work and which one to choose; in general it’s best to minimize costs, but costs are not always easy to understand. Lenders don't often show exactly how loans work and what they cost, so it pays to run the numbers yourself.
For most loans, a basic Loan Amortization Calculator will illustrate how things work. If you really want to play with the numbers, use a spreadsheet to see what happens when you change the variables.
Paying Down the Loan Balance
It’s only a loan if you repay it. As you figure out how loans work, you’ll see that most loans get paid off gradually over time. Each monthly payment is split into two parts: a portion of it repays the loan balance, and a portion of it is your interest cost. An amortization table shows how this works, and how interest costs go down over time.
How Amortization Works
A loan may or may not have a "term" - a length of time over which you repay it. Some mortgages last for 30 years, while other loans may only last 3 years. Credit cards are "revolving" loans, meaning you can borrow and repay as many times as you want without applying for a new loan. The term affects how your loan works; shorter terms require larger payments.
Qualifying for a Loan
To get a loan you’ll have to qualify. Lenders only make loans when they think they’ll be repaid. Your credit is important in helping you qualify, since it shows how you’ve used loans in the past. Good credit means you’re more likely to get a loan at a reasonable rate. You may also need to show that you have enough income to repay the loan.
How Debt to Income Ratios Work
If you don’t have strong credit or if you’re borrowing a lot of money, you may also have to secure the loan with collateral. This allows the lender to take something and sell it if you’re unable to repay the loan. You might even have to have somebody with good credit co-sign the loan, which means they’ll promise to repay it if you can’t.
And more...
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