Understanding the basic principles behind a loan can save new borrowers a lot of stress and make the borrowing process easier. This article will explore some of those loan basics.
A consumer loan is simply when a financial institution lends you money with the promise (from you) that you will repay the money. Most loan payments include both principal and interest.
Principle is the amount of money that you borrowed. Interest is the price paid for borrowing money; this is usually expressed as a percentage.
In an interest-only loan, the interest of the loan is paid off before the principal. It is important to understand this because many mortgages are interest-only loans. Using this kind of loan allows the lender to make a faster profit on the loan, and in return it also allows the lender to offer you lower interest rates.
Borrowers should understand that during the first years of an interest-only mortgage the entire monthly payment goes toward interest. Because of this there will be no decrease in the amount of the principle that was borrowed. In some cases, the initial interest-only payments are lower than the principal payments. This allows the...
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