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What is a simple loan?
Most people borrow money at some point in their lives. One of the easiest to understand is a simple loan. You borrow a certain amount of money from a lender and in exchange you agree to repay the amount plus interest over a period of time. Loans can be obtained from financial institutions or individuals – and can be used for a variety of purposes, such as buying a car or house, starting a business, or consolidating other debts into one.
How much loan can I afford?
Budgeting for expenses that require a loan works best if you start with a calculator. Before making any purchase that involves a loan, it's wise to research today's interest rates and see how much you're likely to be charged for the loan. The cost of a loan depends on three things: how much you borrow, the interest rate you're charged, and the term of the loan - the number of years you have to repay it.
When you play with these three key numbers, you'll see how much things can change. Let's say you want to borrow $15,000 for home renovations at 5.9%. If your loan term is three years, your monthly payment will be $455.65. If it's five years, it drops to $289.30. And if the renovation budget grows to $25,000, your three-year payment is $759.42 and your five-year payment is $482.16. Spread it over 10 years? $276.30. That's 10 years of interest payments, which isn't much.
Once you find possible offers, plug them into the calculator and see how much they would cost you. One way to keep track of different configurations of interest rate, loan amount, and loan term is to create a spreadsheet so you can quickly compare.
Smart loans
Before you sign anything, be aware of the early repayment penalty in the fine print of your loan agreement. If you get a raise or other unexpected financial losses, this can cause problems. A prepayment penalty means that you will be charged an extra fee if you are able to pay off the loan before it is due.
Laws today protect borrowers from discriminatory lending practices, but that doesn't mean all financial institutions follow the law. Beware of discrimination and scams. Credit fraud often involves fake loan offers that attempt to obtain your personal information. Warning signs of a fraudulent offer include upfront fees and vague loan requirements.
Laws prohibit discrimination in lending on the basis of race, color, religion, sex, national origin, disability, marital status, age, and whether you receive public assistance. These are all considered protected classes. But there is discrimination in loans. If you believe you have been discriminated against, you can file an online credit discrimination complaint with the Consumer Financial Protection Bureau.
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