What is a Loan?

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What is a loan?
A loan is a sum of money borrowed from a creditor that you pay back with interest. Loans can be secured or unsecured.


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The term "loan" refers to loan is a lump sum of money you can borrow through a lender -- one like a credit union, bank or online lender -- or from a person, such as family members, and pay back in full at an earlier date, usually with interest.
All loans have similar attributes. There are different types of loans according to what you want to use them to fund.
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How do loans function?
The most common types of loans have four main features that include principal and interest, installment payments and term. Understanding each of these will help you decide whether the loan is right for your requirements and how affordable it is.
Principal It is the amount you can borrow from a lending institution. It could be $500,000 to purchase an entire house renovation or $500 for car repair.
Interest: The interest rate is the cost associated with the loan which is the amount you have to pay back along with the principle. Lenders determine your interest rate based on several factors, including your credit score, the type of loan and the amount of time you have to repay the loan.
Interest differs from the , or APR, which includes other costs such as upfront charges.
Installment payments: Loans are usually repayable on a regular basis generally monthly to the lender. The amount you pay each month is typically a fixed amount.
Term: The loan term determines the length of time it will take to repay the loan in total. Depending on the type of loan the loan term could range from a few weeks up to several decades.
Types of loans
Loans can be classified within two general categories that include secured loans and unsecure loans.
Secured loans
Examples of a loan for a mortgage or an auto loan.
For , the lender typically will use a physical asset like your home or car for security if you cannot pay back the loan as agreed. The lender bases its interest rates on this property and also on your credit score and credit history. Secured loans typically offer lower rates of interest than unsecured loans.
Unsecured loans
Examples of a student loan to fund education, an individual loan or a payday loan.
Lenders offering base your price on credit ratings and credit history, as well as your income, and any existing debt. If you fail to repay the loan in the manner agreed upon the lender won't be able to take your assets however, it could report the default to the credit bureaus. This will impact your credit score as well as your chances of getting another loan in the future.
Unsecured loans generally have higher interest rates and smaller loan amounts in comparison to secured loans.
Here's a look at the different kinds of loans along with their interest rates and terms.
Type of loan



A typical interest rate



Common terms



2.5% up to 3.5%.


15 to 30 years old.


From 3% to 20%.


2 to 6 years.


From 1% to 15%.


10 years.


From 6% to 36%.


From 2 to 7 years.


400%.


Between 2 and 4 weeks.








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About the author: Amrita Jayakumar is a former writer for NerdWallet. She previously worked at The Washington Post and the Miami Herald.







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