How loans work

Want to buy something big? You may need to borrow money. See how loans work.


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Need money to pay for something big, like a car or college education? You may need a loan. Let’s look at how loans work. Image Description
With a loan, you receive all the money the lender has approved for you in one lump sum. This is called the principal. Then, to pay the lender back, you need to make equal monthly payments, called installments, for a fixed period of time, until the loan is paid off. Image Description
The lender may also charge you fees for giving you the loan. On top of repaying the principal, you’ll also have to pay the lender interest. Image Description
How much interest you’ll pay for your loan depends on three main factors: how much you’re borrowing, the interest rate, and how long it will take you to pay the money back. This is called the term of the loan. Image Description
For more about how the term and interest rate affect the cost of credit, click Next.
Before you apply for a loan, consider your overall spending plan. How much of a monthly payment can you comfortably manage to repay every month?
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