What Is a Loan?

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What is a loan?
A loan is a sum of money borrowed from a creditor which you repay with interest. They can be secured as well as unsecure.


The last update was on Jan 11 2022.

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The term "loan" refers to loan is a lump sum of money that you borrow at a bank, credit union or other financial institutionsuch as a bank, credit union or an online lender or from a person, such as family members, and pay back the entire amount at an earlier date, usually with interest.
All loans share the same characteristics. There are various types of loans dependent on the purpose you intend to use them to fund.
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How do loans work?
The most common types of loans have four main features that include principal and interest, installment payments and term. Knowing the four main features will help you decide if a loan is right for your requirements and how affordable.
Principal The principal is the amount of money you get from a lender. It may be $500,000 for a new house or $500 for a car repair.
Interest: The interest rate is the price of a loan -- how much you have to pay back along with the principle. Lenders determine your interest rate by analyzing a variety of factors, including your credit score, the type of loan and the length of time you have to repay the loan.
Interest differs from the , or APR which also includes other costs such as upfront charges.
Installment payments: Loans are usually repayable on a regular basis, typically monthly, for the loaner. Your monthly payment is commonly set at a specific amount.
Term term: The loan term refers to the amount of time it will take to repay the loan in complete. The type of loan it can be anything from a few days or even several years.
Types of loans
Loans fall in two categories: secured loans and unsecured loans.
Secured loans
Examples: A loan for a mortgage or an auto loan.
In most cases, the lender will use a physical asset like your home or car, to secure its money should you not be able to repay the loan as agreed. The lender bases your interest rate on the asset along with the credit rating and history of credit. Secured loans typically have lower interest rates than unsecured loans.
Unsecured loans
Examples: A student loan to fund education, an individual loan or payday loans. payday loan.
The lenders offering loans base your interest rate on your credit score, credit history, income and existing debt. If you fail to repay the loan according to the terms agreed upon the lender isn't able to seize your assets however, it could declare the default to credit bureaus, which will impact your credit score as well as your chances of getting another loan in the future.
Unsecured loans typically have greater interest rates and lower loan amount than secured loans.
Here's a snapshot of different kinds of loans, as well as their terms and rates of interest.
The type of loan



The typical interest rate



The most common terms



2.5 percent to 3.5%.


15 or 30 years.


From 3% to 20 percent.


2 to 6 years.


1- 15%.


10 years.


From 6% up to 36%.


2 to 7 years.


400%.


From 2 weeks to four weeks.








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About the writer: Amrita Jayakumar is a former writer at NerdWallet. She was previously employed by The Washington Post and the Miami Herald.







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