Glossary of Financial Terms
Each country and culture views money differently. Here in the United States, we often rely on “credit” by borrowing money to pay for the things we want and need, instead of saving our money to buy them later.
As a result, there are lots of places to borrow money, or “get a loan” or Note. There are banks, credit unions, and many other types of financial institutions. All loans will require you to make monthly payments until you pay back the full amount of the loan plus the “interest”, which is the amount the lender charges you for getting the loan.
You can borrow money to buy a car, boat, take a vacation, pay for a wedding, buy a house, and more. When you buy an expensive item like a car or house, the car or house is called “collateral”, and you don’t really own it until you finish paying the loan. The bank or other lender is the owner. You can use the item as if you already owned it, but if you don’t make your monthly payments, the lender can take it back.
If you buy other things, like pay for a wedding or take a vacation, there is no collateral, so the loan is “unsecured”. Unsecured loans are usually more expensive than loans with collateral, because there is a higher risk for the lender if you don’t make your payments. They can’t take back your vacation!
Credit cards are unsecured loans, since you can use them to buy almost anything. A credit card is actually a “line of credit”—a loan that you can use over and over again. For example, if you get a $1,000 credit card line of credit, you can buy clothes, airline tickets, dinner at a restaurant, and more. After one month, you will need to make a payment on your line of credit—either a small minimum payment, or you can pay the entire amount that you purchased. The $1,000 is reduced by all the purchases you’ve made, until you pay them back in full.
The Annual Percentage Rate, or “APR”, is the cost of your loan stated as a yearly percentage rate. You should always compare APRs, not the interest rate, since the APR includes the interest rate and other finance charges.
How to Get a Loan
In order to get a loan, a person usually needs to have a “credit history”, or experience borrowing and repaying other loans. Your credit history tells a lender whether it is safe to lend you more money or not. If you have poor or no credit history, you are a bigger risk and will probably pay a lot more interest on your loan (if you can get approved for a loan at all). If you have an excellent history of borrowing and repaying loans, you are considered a good risk, and you will have no problem being approved for a loan at a low cost.
In addition to your credit history, you will also have to show a lender that you can afford to make the monthly loan payments. The lender will look at all of your income and all of your expenses, and estimate your ability to repay the loan. You will need to provide proof of your income, like a copy of your paycheck or your income tax forms.
If you do not have good credit history or enough income, the lender may ask you to have another person as a “co-signer” on your loan—someone who will make the loan payments if you cannot. The lender may also ask for “security”, such as locking up some money in your savings account until you repay the loan.
Applying for a loan is usually free, except for home loans. A home loan will require you to pay a few hundred dollars for a professional “appraisal”, which will show you and the lender what the house is worth. There are other fees for home loans, which can add up to a few thousand dollars.
Once you are approved for your loan, the lender will show you all the details about your loan; such as the total amount of the loan, the monthly payment amount, the amount of money you will pay for getting the loan, and more. You are not required to accept the loan! If you are uncomfortable with the details of the loan, you can tell the lender “no”. Make sure that you completely understand the loan and fees, if any, since you are signing a contract when you accept the loan.
All details about your loan are confidential, and cannot be shared with others. Each person’s financial situation is unique, and details about their loans cannot be shared, either.