PART 1 – HOW LOANS WORK
This blog post is the first in a three-part series. Read Part 2: Know This Before Taking Out a Loan and Part 3: PATF Loan Terms Matter.
When you hear the word “loan,” what do you think of? Perhaps you imagine feeling tied down with looming debt. Or maybe you worry about being over-extended with monthly payments you can’t afford. If you have never borrowed money before, or if you have had a negative experience with debt, the thought of a loan might cause you to run the other way. However, when you understand how loans work, you can shop for an affordable loan that fits your needs, provides broader long-term benefits, and allows you to make a necessary purchase. In the end, the right loan can grant you freedom and opportunity you didn’t have before.
The Basic Structure of a Loan
When a lender agrees to extend money to you, that is called a loan. Your commitment is to pay that money back, usually in regular installments throughout an agreed-upon amount of time – this is called the loan term. Each of those repayments goes toward both principal (the original amount loaned to you) and interest (the cost of borrowing money, usually a percentage of the remaining principal). Sometimes there are associated fees as well, which may include application fees, late payment fees, check processing fees, prepayment fees, and more.
In short, a loan is simply money you’ve borrowed and made a promise to repay over a certain period. The monthly repayment amount includes the amount you borrowed, plus any interest and fees.
Here is an example of a PATF mini–loan and monthly repayment:
How Do You Know if a Loan is Right for You?
Many people consider borrowing money at times in life when they do not have all the money needed to pay for expensive things they may need, like a vehicle, a home, assistive technology, or college tuition. The right loan can help bridge that gap.
| Assistive technology (AT) is any device that helps a person with a disability achieve a more independent and satisfying life. The federal definition of assistive technology under the Assistive Technology Act is “any item, piece of equipment, or product system, whether acquired commercially, modified, or customized, that is used to increase, maintain or improve functional capabilities of individuals with disabilities.” |
Unlike PATF’s mini loans, most loans aren’t free money, meaning they have no fees or interest. When you take out a loan you must pay it back, (along with the interest and fees a lender may charge). For this reason, before you borrow, you’ll want to think carefully about the following:
- Is the purchase you plan to make with your loan a need, meaning it is essential and you must have it now, instead of saving up to buy it later?
- Have you comparison-shopped (if applicable) to get the best price?
- Have you looked at other funding options (see our Funding Your Assistive Technology Guide ).
- What other large expenses do you have, or could you have, which may affect your ability to repay the loan on time and in full?
- How will this loan impact your credit score? Note: A loan payment that fits your budget can improve your credit score. A good credit score opens possibilities for employment, housing, and easier, less costly future borrowing.
Still feeling unsure about whether a loan is right for you…
Don’t worry, next we’ll cover the what you should know before taking out a loan and teach you how to avoid excessive debt and spending beyond your means.
You can learn more about PATF’s loan programs on our Financial Loans page.