Featured image forUnderstanding Loans, Part 1: How loans work, and when you should consider one

This blog post is the first in a three-part series. Read Part 2: Six Questions to Ask Before Taking Out a Loan and Part 3: 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 over the course of 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, sometimes with a little extra in the form of interest and fees.

Here’s a helpful example:

PATF has two loan options for the purchase of assistive technology:

PATF Mini-Loans cover loan amounts between $100 and $7,000, have an interest rate of 0%, repayments as low as $20/month, and a loan term of up to 3 years.

PATF Low-Interest Loans cover loan amounts between $7,001 and $60,000, have an interest rate of 3.75%, and repayment terms that depend on the expected life of the assistive technology device.

PATF does not charge any application fees.

How Do You Know if a Loan is Right for You?

Most people consider borrowing money at times in life when they do not have all the money right now to pay for expensive things they really need, like a vehicle, a home, assistive technology, or college tuition. The right loan can help bridge that gap. And, an affordable loan that fits your budget will provide other benefits as well. With every on-time repayment you make, you will improve your credit score (a number that represents the likelihood you will pay back a debt). A good credit score opens up greater possibilities for employment, housing, and easier future borrowing.

Of course, loans aren’t free money. When you take out a loan you have an obligation to pay it back, and most loans actually cost money through interest payments and fees. For this reason, you’ll want to think carefully about whether the purchase you plan to make with your loan is truly a need (instead of simply a want) and whether you must have it now (instead of saving up to buy it later). (Not sure? Check out: The Difference Between Wants and Needs.) And of course, consider your ability to repay the loan in a timely manner before choosing to borrow.

Still feeling uncertain about whether a loan is right for you?

Rest assured! Next week we’ll cover the six questions you should ask before taking out a loan and teach you how to avoid excessive debt and spending beyond your means. Stay tuned!

You can learn more about PATF’s loan programs on our Financial Loans page.