why are loans used 
loans are advanced for a number of reasons including major purchases investing renovations debt consolidation and business ventures loans also help existing companies expand their operations loans allow for growth in the overall money supply in an economy and open up competition by lending to new businesses the interest and fees from loans are a primary source of revenue for many banks as well as some retailers through the use of credit facilities and credit cards components of a loanthere are several important terms that determine the size of a loan and how quickly the borrower can pay it back in addition the lender may also tack on additional fees such as an origination fee servicing fee or late payment fees for larger loans they may also require collateral such as real estate or a vehicle if the borrower defaults on the loan these assets may be seized to pay off the remaining debt tips on getting a loanin order to qualify for a loan prospective borrowers need to show that they have the ability and financial discipline to repay the lender there are several factors that lenders consider when deciding if a particular borrower is worth the risk in order to increase the chance of qualifying for a loan it is important to demonstrate that you can use debt responsibly pay off your loans and credit cards promptly and avoid taking on any unnecessary debt this will also qualify you for lower interest rates it is still possible to qualify for loans if you have a lot of debt or a poor credit score but these will likely come with a higher interest rate since these loans are much more expensive in the long run you are much better off trying to improve your credit scores and debt to income ratio relationship between interest rates and loansinterest rates have a significant effect on loans and the ultimate cost to the borrower loans with higher interest rates have higher monthly payments or take longer to pay off than loans with lower interest rates for example if a person borrows 5 000 on a five year installment or term loan with a 4 5 interest rate they face a monthly payment of 93 22 for the following five years in contrast if the interest rate is 9 the payments climb to 103 79 higher interest rates come with higher monthly payments meaning they take longer to pay off than loans with lower rates similarly if a person owes 10 000 on a credit card with a 6 interest rate and they pay 200 each month it will take them 58 months or nearly five years to pay off the balance with a 20 interest rate the same balance and the same 200 monthly payments it will take 108 months or nine years to pay off the card the interest rate on loans can be set at simple or compound interest simple interest is interest on the principal loan banks almost never charge borrowers simple interest for example let s say an individual takes out a 300 000 mortgage from the bank and the loan agreement stipulates that the interest rate on the loan is 15 annually as a result the borrower will have to pay the bank a total of 345 000 or 300 000 x 1 15 compound interest is interest on interest and that means more money in interest has to be paid by the borrower the interest is not only applied to the principal but also the accumulated interest of previous periods the bank assumes that at the end of the first year the borrower owes it the principal plus interest for that year at the end of the second year the borrower owes the bank the principal and the interest for the first year plus the interest on interest for the first year with compounding the interest owed is higher than that of the simple interest method because interest is charged monthly on the principal loan amount including accrued interest from the previous months for shorter time frames the calculation of interest is similar for both methods as the lending time increases the disparity between the two types of interest calculations grows if you re looking to take out a loan to pay for personal expenses then a personal loan calculator can help you find the interest rate that best suits your needs types of loansloans come in many different forms there are a number of factors that can differentiate the costs associated with them along with their contractual terms loans can be secured or unsecured mortgages and car loans are secured loans as they are both backed or secured by collateral in these cases the collateral is the asset for which the loan is taken out so the collateral for a mortgage is the home while the vehicle secures a car loan borrowers may be required to put up other forms of collateral for other types of secured loans if required credit cards and signature loans are unsecured loans this means they are not backed by any collateral unsecured loans usually have higher interest rates than secured loans because the risk of default is higher than secured loans that s because the lender of a secured loan can repossess the collateral if the borrower defaults rates tend to vary wildly on unsecured loans depending on multiple factors such as the borrower s credit history loans can also be described as revolving or term a revolving loan can be spent repaid and spent again while a term loan refers to a loan paid off in equal monthly installments over a set period a credit card is an unsecured revolving loan while a home equity line of credit heloc is a secured revolving loan in contrast a car loan is a secured term loan and a signature loan is an unsecured term loan 