What is a loan?
A loan is money you borrow and agree to pay back over time—usually with interest. Loans are used for things like cars, education, home improvements, or consolidating debt.
Common loan types
- Personal loans (often unsecured)
- Auto loans (secured by the vehicle)
- Student loans
- Business loans
- Secured vs. unsecured loans
How interest works
Interest is the cost of borrowing. It’s commonly expressed as an APR (Annual Percentage Rate), which includes the interest rate and sometimes fees. A higher APR generally means higher total cost.
Repayment & amortization
Many loans are repaid in fixed payments. Early payments often include more interest; later payments include more principal. This schedule is called amortization.
Key terms
- Principal: the amount borrowed
- Interest: the cost of borrowing
- APR: yearly borrowing cost including fees (when applicable)
- Term: how long you repay the loan
- Payment frequency: monthly, biweekly, etc.
FAQ
Is a lower interest rate always better? Usually, but also compare fees, term length, and flexibility.
Can I pay a loan off early? Often yes, but some loans have prepayment penalties—check your agreement.
What affects my rate? Credit score, income, debt-to-income ratio, term length, and whether the loan is secured.