How Does a Loan Work?

For large expenses like college, many people find they don’t have enough money saved to cover the total cost. If you find yourself in that situation, you may need to take out a loan. After researching lenders and applying for the best one for your needs, you’ll receive your loan along with terms outlining expectations for repayment.

When you borrow money from a lender in the form of a loan, you enter into a contract to repay the full amount of the loan plus interest over an agreed-to time period. Interest is what you’re charged by the lender for the ability to borrow money and is typically expressed as an annual percentage rate (APR).

Typically, when you borrow money, the lender checks your credit to make sure you’ve consistently made payments on time and aren’t already carrying too much debt. This is true for private lenders who offer student loans. However, federal student loans backed by the government don’t require credit checks. This is good news if you’re a high school graduate who hasn’t had time to establish much of a credit history or if you don’t have a high credit score.

When you borrow money from a lender in the form of a loan, you enter into a contract to repay the full amount of the loan plus interest over an agreed-to time period.

Managing Loans and Debt 

While taking out a loan to pay for college is an investment in your future, take care not to accumulate so much debt that repaying it becomes difficult to manage.

In 2013, college graduates had an average of $29,400 in student loan debt, according to the Institute for College Access and Success. With that much money tied up in loans, it’s no surprise that college graduates feel the financial pinch from taking on so much debt. These debts can impact your ability to meet other financial goals in the future. Findings from financial planning company LearnVest indicate that 44 percent of college graduates put off buying a home and 23 percent wait longer to start a family because of student loan debt.

Keep your student loan debt burden to a minimum and ensure a healthy financial future with these tips:

Take out loans strategically. Explore both federal and private loan options. If federal loans don’t cover all of your expenses, consider using private loans to supplement them. With some federal loans, the government will pay the loan interest while you attend school.

Look into other financial options. You can lower the cost of college tuition by applying for scholarships, grants and work-study programs.

Employ cost-cutting measures. Taking general requirement courses during your first year or two at a community college is often cheaper than taking the same classes at a four-year school. Just make sure you can transfer the class credits. Commuting to college versus living on campus also significantly cuts costs.

Borrow only what you need. Don’t let the opportunity for deferment with federal student loans lure you into taking out more than you really need. This money should go toward tuition, books and reasonable living expenses—not a fancy apartment, car or spring break trip.

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