How Loans Work
Money is a key element of life. Your house, your car, your television, your gym membership, and all your food are a product of your finances. It is important and sometimes necessary to have certain purchases made in our day to day lives, unfortunately, it is hard to keep up with funding those purchases out of our own pockets. Whether you are about to personally make a big purchase, or are a business owner investing in your business, or just need a little extra money on hand, a loan could be a viable option for you. There are a variety of loans available to suit your financial needs. For example, there are Las Vegas business loans available for a business, or a Mortgage Loan if you are looking to buy a house. Point is, if you need a loan there is a high chance that you can find a loan that is right for you and your circumstances. However, before taking out any loan, personally or for a business, it is important to understand how loans work so that you can make a more informed decision regarding your financial health.
The Process of a Loan
Repayment and Life of Loan
To begin the process of the loan, you, the loaner, would receive a loan from whatever lender you deemed most suitable for your needs. Over time, you will pay back the money you receive from the lender with additional interest. This repayment process typically occurs over the life of your loan, whether that is four years or forty years. You and your lender can come to an agreement on what the life of your loan will be.
Interest is easiest to think of as the fee you pay the lender for borrowing their money. Depending on your loan, your principal amount will either have one of two options:
- Compound Interest
- Simple Interest
This is the most clear type of interest. The rates of interest for this type are multiplied by the principal loan balance at each payment period to find the interest due.
This interest is common with credit cards and savings accounts. This type of interest will compound the charge of interest on the principal loan balance and on previously earned interest. This type of interest payment can add up quickly, so be sure to be aware of whether your loan has compound or simple interest.
When paying off your loan, your payment schedule and amounts will vary depending on the loan you take out. For the most part, payment will be a combination of all of the interest that arose during the last month and a small amount of the principal balance you borrowed. As you continually pay off the interest and the principal, less interest will arise each month until you pay your final payment.
Regardless of the purchase you are hoping to make, if you are in need of some extra financial support, a loan is a great option. By being more aware of what the process of a loan is, you can be more informed in your future financial decisions.