What is a Loan?


Investopedia defines a loan as “money, property, or other material goods that is given to another party in exchange for future repayment of the loan value amount along with interest or other finance charges.”


How Can I Take Out a Loan?

Almost all loans are subject to approval based on factors like ones’ credit score. Upon approval, the individual has to complete a Promissory Note, which serves as a written agreement stating that the borrower promises to pay the loan distributor back, in addition to explaining the terms of said loan.


What is Interest?

Interest is “the charge for the privilege of borrowing money”. It is also called the annual percentage rate (APR). In short, interest is what percentage of the loaned amount an individual will have to repay in addition to the borrowed amount. For example, if a person takes out a 1,000 personal loan with a 15% APR, the individual will ultimately be responsible for repaying an amount of 1,150 (15% of 1,000 is 150; 1,000+ 150 =1,150).

There are two types of interest rates:

  • Simple interest: A fixed percentage of interest that does not change over time

  • Compound interest: A percentage rate that changes over time (annually, monthly, etc.) and is calculated to the principal amount of the loan in addition to the interest rate that is already accumulated

What are the Different Types of Loans?

Loans can be taken out in many different forms; including:

  • Student Loans: Loans offered to college students and their parents/guardians to fund education

  • Mortgages: Loans distributed by banks that allow users to purchase a home

  • Auto Loans: Loans issued by banks or auto dealerships that would fund the purchase of a car

  • Personal Loans: Loans that a person can take out to fund personal expenses such as traveling, leisure, bills, etc.

  • Small Business Loans: Loans given to entrepreneurs to help fund the launch or expansion of their company

  • Payday Loans: Short-term loans that help an individual who needs expenses to suffice until their next paycheck. These often come with high interest rates

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