L - Loans 101 Lesson

Loans 101

When you decide to borrow money, there is always a cost associated with that borrowing. It is important to know about loans, and to understand that a loan can have a significant effect on the overall purchase price of whatever it is you are buying. Through exploring the laws and regulations in place to protect consumers from lender abuses, you can learn how to determine when you should take out a loan and what type of loan would best meet your needs.

Loan Basics  

At one time or another, most people encounter situations where they must get a loan to pay for something they need. This is also true for companies and governments. As a consumer and a taxpayer, it is important that you understand loans and interest and how they can affect both the lender and the borrower. To help you better understand loans, interest and interest rates, imagine the following scenario:

If you buy a $35,000 car and take a six-year loan at a rate of 7.9%, you will end up paying over $9,000 in interest on the car making the total cost of the car $44,000.

 

Loan Basics Interactive

 

 

Personal Loan Table

View the table below to see how the sample loan of $300 was repaid over a period of four months with 2% compounding interest.

loan table with 1. displaying 2.00% interest rate, 2. $6.00 interest charge, 3. $246.00 ending outstanding loan, 4. $4.92 interest charge, and 5. $90.92 ending outstanding loan

  1. The loan had an interest rate of 2% per month that changes to .02 for calculations
  2. Calculate the interest charge by multiplying .02 x $300 to get $6.00
  3. Subtract the loan payment and add the interest $300 - $60 + $6 = $246
  4. Calculate 2% of the remaining balance .02 x $246 = $4.92
  5. Subtract the loan payment and add the interest $246 - $160 + $4.92 = $90.92
  6. Continue the process until loan is paid off

 

The Truth in Lending Act and Selecting a Lender

As you can see, getting a loan can be a complicated process with many factors to consider. One of the ways consumers are protected is through the Truth in Lending Act. This legislation is designed to make sure that the borrower has enough information to understand the loan's interest rate and terms.

Not all lenders are alike. Some offer better loan packages than others. When you decide to borrow money, you should always research the various types of loans available. Using the Internet or the phone to survey the interest rates and fees associated with a loan is an effective way to narrow your search for a lender. When researching a lender, factors to consider should include:

  • Loan fees charged to the borrower for processing and completing the loan transaction
  • Interest rate on the loan
  • Repayment terms on the loan (some lenders charge penalties for early repayment of the loan)

In addition, remember to select a reliable lender such as a bank or credit union if possible. Avoid taking loans from loan sharks, which are not regulated, and be aware that companies that offer payday loans -  they tend to lend small amounts of money ($500 or less) and can include an APR (Annual Percentage Rate) of up to 400%! Regulations for payday loans vary from state to state. These loans are really just cash advances against the next paycheck you will receive from your employer.

 

IMAGES CREATED BY GAVS