What Is a Loan?
A loan is money provided to you now by a third party that must be repaid later, usually over a specified time period. So how does that work? When you take out a loan, a lender agrees to let you borrow money in exchange for repayment of the loan amount (principal) along with interest, usually a percentage of the loan amount, and any charges or fees. The loan can be for a specific, one-time amount (such as an auto loan) or an open-ended credit up to a specified maximum (called a line of credit, such as with credit cards). You’ll have an opportunity to review the terms of the loan, including the amount of interest to be charged and repayment details, before money exchanges hands.
When you take out a loan, you’re relying on borrowed money to help you make a purchase. While it’s important not to borrow more money than you can reasonably afford to pay back, taking out a loan can help you afford items that improve your financial situation in general, such as a car so you can drive to work or student loans that may help you obtain a higher-paying job.
Building a history of on-time payments also improves your credit score, which in turn affords you favorable terms when you need to borrow money again. You’ll also demonstrate responsibility to others who may check your credit, like prospective employers or landlords. By being a responsible borrower, you’ll enjoy the benefits of good credit and build the foundation for financial success.
Building a history of on-time payments also improves your credit score, which in turn affords you favorable terms when you need to borrow money again.
When you’re still establishing your credit history or if you have a low credit score, you may need someone, such as a family member or friend, to vouch for your credit. That person is called a co-signer. He or she also takes on equal responsibility for repayment of the loan. In other words, if you fail to make payments, your co-signer is legally contracted to pay on your behalf. Any missing or late payments will negatively affect both your and your co-signer’s credit scores.
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