What Is a Simple Loan?

Most people borrow money at some point in their life. One of the easiest to understand is a simple loan. You borrow a sum of money from the lender and, in exchange, agree to repay the amount plus interest over a specific period of time. Loans can be acquired from financial institutions or individuals—and can be used for a variety of purposes, such as for the purchase of a car or a home, to start a business, or to consolidate other debts into one.

How Much Loan Can I Afford?

Budgeting for an expense that requires a loan works best if you start with a calculator. Before you make any purchase that involves taking out a loan, it’s wise to research today’s interest rates and figure out what you are likely to be charged to borrow. Loan costs depend on three things: how much you are borrowing, the interest rate that you’re being charged, and the term of the loan—the number of years you will be given to pay it back.

As you play with these three key numbers, you’ll see how much things can change. Let’s say that you want to borrow $15,000 for a home renovation at 5.9%. If your loan term is three years, then your monthly payment will be $455.65. If it’s five years, it goes down to $289.30. And if that renovation budget swells to $25,000, your three-year payment is $759.42, and the five-year is $482.16. Spread it out to 10 years? $276.30. That’s 10 years of interest payments, which is not a great deal.

As you find possible deals, plug each one into the calculator and see what they would cost you. One way to track the different configurations of interest rate, loan amount, and loan term is to make a spreadsheet to make some quick comparisons.

Loan Smarts

Before you sign anything, watch out for a prepayment penalty in the fine print of your loan agreement. If you get a raise or other unexpected financial windfall, this could cause problems. A prepayment penalty means that you would be charged extra if you’re able to pay off your loan sooner than its term.

Laws today protect borrowers from discriminatory lending practices, but that doesn’t mean all financial institutions follow the law. Be on the lookout for discrimination and scams. Loan scams often involve fake loan offers that attempt to collect your personal information. Red flags of a fraudulent offer include up-front fees and vague lending requirements.

Laws forbid lending discrimination based on race, color, religion, sex, national origin, handicap, familial status, age, and whether you receive public assistance income. These are all considered protected classes. But lending discrimination happens. If you believe you have been discriminated against, you can submit a lending discrimination complaint online with the Consumer Financial Protection Bureau.