Does it surprise you when you hear about a rich dude going into debt on a big loan? I guess my first impression was that loans were for the rest of us, but it turns out: loans are everywhere.
Does it surprise you when you hear about a rich dude going into debt on a big loan? I guess my first impression was that loans were for the rest of us, but it turns out: loans are everywhere.
Good news for us, from student loans to mortgages: they all have the same general concept and characteristics, so in this video I’m going to break down what you can generally expect out of a loan.
Hey MoneyLion, my name’s Austin Hankwitz and I talk about personal finance and investing online. I grew up in a small town in northeast Tennessee and after I graduated college, I was stuck with some student loans. Let me walk you through what I’ve learned about them.
Money Life Lesson: Loans are pretty easy to understand – when you borrow money in the form of a loan you need to pay back the amount you borrowed plus a bit extra, called interest, by a specific date.
The Daily Deposit: Maybe you’re in the situation I was – you want to go to college but you can’t pay for it. So, you take out a loan to pay for college aka student loans. This loan, like many others, has a few specific characteristics that you need to understand.
One, the loan amount – how much are you borrowing, and therefore, how much do you need to pay back?
Two, interest rate – how much extra money do you need to pay back on top of the original amount you borrowed? This is usually expressed as a percentage and is “billed” annually.
Three, the term of the loan – when does the total amount of money need to be paid back by?
There’s another huge factor: fees. Every loan is different, and many fees are listed in the fine print. Some loans come with origination fees, or upfront fees to even borrow the money. Some have prepayment penalties, or extra fees you pay for paying off the loan early – which blows my mind, but anyway. Things to watch out for before you borrow.
Boom! Now you know how loans work. Remember, borrowing money can be a slippery slope – so don’t get too carried away.
A quick heads up: this video is sponsored by MoneyLion. All content is for informational purposes only and should not be construed as financial advice.
Video Summary
Loans help us acquire goods and services even if our bank accounts fall short. Rich people frequently take out loans to fund new initiatives. While we can select from various loans, they all have the same concept and characteristics. We’ll explore everything you need to know about understanding a loan.
Why do people take out loans?
People take out loans to cover financial gaps. Homebuyers make a down payment to acquire their home. A mortgage loan closes the gap in the purchase price. Students also take out loans to afford their college education.
Some people take out loans to outperform the interest rate. Some billionaires finance their homes because they can outperform interest rates by putting the extra money into the stock market, rental properties, or another asset. When taking out a loan, you’ll come across many choices. Pay attention to these characteristics before taking out a loan.
Loan amount
The loan amount measures how much you borrow. You’ll receive immediate access to extra funds to help with your purchase. However, you will have to pay back the loan amount over time. Taking out an oversized loan can add significant stress to your finances. Just make sure you only take out as much principal as you can pay back.
Interest rate
Every loan comes with an interest rate. This rate indicates how much you’ll pay on top of your principal. Lenders take a risk when handing out loans. Interest payments reward lenders for the risk they incur. Review multiple loans to find the most attractive rates. Raising your credit score and making a larger down payment can both reduce the interest rate on your loan.
Loan term
Every loan has a deadline for repayment. Loan terms are the payment schedules for your loans. They indicate monthly payments and how long the loan lasts. You can lengthen the term of the loan to reduce the size of your monthly payments as well. However, this will also result in you having to pay more interest payments over time. Shorter loan terms make it possible for you to repay the debt quicker.
Fees
Each loan is different, and some come with fees. Review the fine print before taking out a loan, so you don’t get hit with a surprise. You may find many fees, but these two show up in many loans:
- Origination fee: the upfront fee you pay for taking out a loan
- Prepayment penalties: penalties for paying off the loan early
Borrow money responsibly
Borrowing money is a slippery slope. Some people borrow too much too soon and fail to keep up with interest rates. Before borrowing money, establish a budget, so you borrow the right amount. In some cases, you can adjust your loan term to make the debt more manageable.
