Basic Principles Of A Loan

Basic Principles Of a​ Loan
Understanding the​ basic principles behind a​ loan can save new borrowers a​ lot of​ stress and make the​ borrowing process easier .​
This article will explore some of​ those loan basics.
A consumer loan is​ simply when a​ financial institution lends you​ money with the​ promise (from you) that you​ will repay the​ money .​
Most loan payments include both principal and interest.
Principle is​ the​ amount of​ money that you​ borrowed .​
Interest is​ the​ price paid for borrowing money; this is​ usually expressed as​ a​ percentage.
In an​ interest-only loan,​ the​ interest of​ the​ loan is​ paid off before the​ principal .​
It is​ important to​ understand this because many mortgages are interest-only loans .​
Using this kind of​ loan allows the​ lender to​ make a​ faster profit on​ the​ loan,​ and in​ return it​ also allows the​ lender to​ offer you​ lower interest rates.
Borrowers should understand that during the​ first years of​ an​ interest-only mortgage the​ entire monthly payment goes toward interest .​
Because of​ this there will be no decrease in​ the​ amount of​ the​ principle that was borrowed .​
In some cases,​ the​ initial interest-only payments are lower than the​ principal payments .​
This allows the​ borrower,​ who expects to​ earn more profit over time,​ to​ obtain a​ larger loan.
Variable Rates versus Fixed-Interest Rates
Aside from interest only loans,​ you​ may see offers for loans that are based on​ either variable rates or​ fixed rates .​
Credit cards generally use either the​ variable or​ fixed rates systems when calculating the​ interest.
Variable rate loans are based on​ the​ prime lending rate,​ and then some additional interest percentage is​ added in​ order to​ cover profits for the​ lender .​
Whenever the​ Federal Reserve raises interest rates,​ your bank will raise your interest as​ well .​
If the​ prime lending rate is​ low,​ variable rate loans and credit cards can be especially competitive with fixed rate loans.
Fixed rate loans and credit cards offer you​ guaranteed interest rates that do not fluctuate .​
You will know what your payments are each and every month based on​ the​ fixed rate percentage of​ the​ loan that you​ took out .​
This offers consumers more emotional security because they do not have to​ worry about their monthly bill increasing suddenly.
All borrowers should understand that variable rates are different than teaser rates .​
Teaser rates are temporary and last only for a​ limited time,​ usually three to​ six months .​
Once that period of​ time is​ over,​ the​ rate will go up and so will your monthly bill .​
One of​ the​ most important principles behind a​ loan is​ establishing a​ good credit history .​
The fastest way to​ get a​ poor credit rating is​ to​ not pay your monthly bill or​ to​ be habitually late in​ paying your bill .​
These activities are usually reported to​ the​ three big credit reporting agencies and this information will stay on​ your credit history record for years to​ come .​
If you​ must take a​ loan out make sure that you​ can make the​ monthly payments on​ time.
If you​ have any questions about your loan or​ the​ interest that is​ being charged ask the​ credit person to​ explain it​ to​ you​ in​ detail .​
They are happy to​ do this .​
As a​ general rule,​ try to​ keep your non-mortgage debt payments below 10-15% of​ your monthly take home pay.

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