Loans are borrowed money that is paid back over a set period of time, often at a set payment and a set rate, and often with interest. They can be taken both from public and private entities by nearly anyone who is qualified. Most people get loans from banks or credit unions whom they have a relationship with. Loans are often taken out to finance a large purchase that one does not have enough liquid assets to pay for in full. They are often used to finance things such as the purchase of a home, automobile, business, or other large asset.

So, what does it mean to be “qualified” for a loan? When you go to take out a loan, for any purpose, from any institution be it public or private, they will likely do what is referred to as, “running your credit.” What this means is that they are checking your credit score to see what your credit score rating is. Your credit score is a reflection of four main factors: How much debt you have versus how much income you make, how much of the debt is owed versus how much is available to you for use, how long you typically keep your accounts or the age of existing accounts, and how many times you have applied for credit in the last five years. To a lender, these are all indicators of your creditworthiness, or how high of a risk it is to lend you money.

There are things to pay attention to when you take out a loan as well. The “term” refers to how long you have to repay the borrowed money and is outlined in the “note.” The “interest rate,” refers to the amount of interest that you will incur on the purchase. So typically, your loan payment consists of the interest payment and your principal payment. The “interest payment” refers to how much interest is paid each time you make a payment, and the “principal payment” refers to how much you are actually reducing the total amount that you owe. When you make a large purchase such as a home or an automobile, the amount of interest that you pay decreases over time. So, the first payments of the loan are mostly interest and very little principal. Over time, as you pay down your principal balance, the cost of interest decreases, which, though your payment stays the same, means that more of your payments go towards the principal balance, or the amount you owe, versus the interest that is accrued.

When you take out a loan, it is important to pay attention to the interest rate that you receive. It will often be a reflection of the credit score that you have. The better your credit, the better the interest rate that you will receive. Additionally, it is important to pay attention to the other terms so that you fully understand what your responsibilities as a borrower are to pay bavk your loan.