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What is in a loan? What you need to know about Credit Products

There are different characteristics in loans and credit products, as well as different loan types. There are some main variables one should look for.

Term / Period

The term or period of your loan tells you how long you can take to pay it back. In a 36-month car loan, for example, you have 36 months to pay it back without getting late, so the loan term is 36 months.

A longer period will have lower monthly payments so one can buy more expensive items (for example, a house). But this costs more in interest. A 30-year mortgage can easily make one pay twice the initial value of the house.

The longest possible term is not necessarily the best. For how long are you comfortable in having this loan haunting you?

Interest rate / APR

APR defines how much you are paying back on top of the amount you received in the first place. You can think of it as how big is the hole in a sinking boat. The water coming in is the interest you have to pay. It adds up on top of what you already have.

For the most part, interest rate and APR are used as synonyms. Basically, the APR, or Annual Percentage Rate, is a specific method to present the Interest Rate. This way you can compare two different loans and be sure to compare apples to apples.

All other things being equal, the lower the APR the better it is.

With or without collateral

You can take on loans with or without collateral. A collateral is an object you give as guarantee to the lender. For example, the car in a car loan, or a house in a mortgage. The lender, let’s say a bank, can take your car if you don’t pay the agreed monthly payments.

Until the loan is paid in full, if the loan has a collateral and you don’t pay the agreed amounts by the due dates, the lender can take the object you gave as guarantee.

Fixed or variable rate

The interest rate (or APR) can be the same for the whole period of the loan (fixed) or it can change based on a set criteria (variable). This is a problem that affects a lot of mortgages, but some credit cards also mislead customers. Customers are lured into a reasonably low interest rate with one trick: it changes later on for a higher rate.

Fixed rates will help you better plan your budget and if monthly payments fit in your plans. Variable rates can be lower in the beginning, but changes can derail your plans in the future.

Unless one has a degree in finance and very healthy financial habits, a fixed rate will be preferable than a variable one.

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IMMI Financial Solutions

4 Comments

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