At some point in your lifetime, you will find it necessary to borrow money. It may be to finance a car, a house, or your college education. Even though most people do borrow money at some point in their lives, they most likely do not understand even the basics of loans and how they work. Here’s a quick guide.

The Components of a Loan Transaction

All loans, no matter what type, consist of three elements: the interest rate, the term, and a security component. The interest rate is the price or cost of borrowing. A financial institution does not lend you money for free. The interest rate is what they charge and the rate may be fixed or it may be variable over time. Interest rates will vary depending upon the type of loan and how much risk is involved. The riskier the loan, the higher the interest rate.

The term of a loan is the amount of time that a borrower has to repay. Different loans have different terms. Car and personal loans typically have shorter terms such as one year to five years. Student loan terms are usually 10 years, while fixed rate mortgages are for 15, 20, or 30 years.

All loans are either secured, meaning some form of collateral is offered, or unsecured. A secured loan, such as a car title loan from Embassy Loans of Florida, offers a vehicle as collateral in order to complete the loan process. An unsecured loan does not require collateral and since it is riskier, often has much higher interest rates.

Types of Loans

There are all sorts of loans available from a number of financial institutions and even private lenders. Most people are familiar with banks and credit unions offering home and car loans. These institutions will also loan money to buy items such as boats, motorcycles, guns, jewelry, and much more. What many people may not know is that they can also use their car in order to obtain a loan.

A car title loan can be obtained by anyone who owns a car that is complete paid off and has the title. The credit requirements are very lenient, since the loan is not based on an individual’s past credit history. A person who has a newer model vehicle (preferably 10 years old or less) that is paid for is the perfect candidate for an auto title loan.

One of the more common types of loans is the student loan. Thousands of college students across the country use student loans, which can be paid off after a person finishes school, in order to obtain an education.