Chapter 9: Loans
Loans are an ever-present aspect of personal finance, and chances are you are going to encounter opportunities for them in the future. Loans aren’t inherently bad, and sometimes can make a lot of sense (for example a home mortgage). They can also be great for building your credit, provided you pay them off on time. The downside is that loans cost interest, and missing payments on loans can have severe impacts to your credit score.
APR
Just like with credit cards, the APR on a loan reflects the total yearly cost of borrowing. This includes the interest rate plus any additional fees. A lower APR generally means a cheaper loan, but always read the fine print—some low-APR loans come with high fees or penalties.
Personal
Personal loans are unsecured, meaning they don't require collateral. They are often used for debt consolidation, medical expenses, or major purchases. Approval is based on credit history, income, and current debt load. Interest rates can vary widely depending on creditworthiness. While personal loans can be helpful if you’re in a pinch, this is an example of “bad debt”, and won’t look great on your credit report.
Business
Business loans provide capital for startups, operations, or expansion. They may require a business plan, financial statements, and a strong credit profile. Some loans are secured by assets like inventory or equipment, while others may be unsecured but require a personal guarantee. Business loans can be super helpful in scaling your business, especially if it means you don’t have to fundraise from investors and give away equity. Just make sure your business cashflow can support the interest expense from the loan.
Auto
Auto loans are fairly ubiquitous secured loans where the vehicle serves as collateral. These loans usually have fixed interest rates and terms ranging from 36 to 72 months. A larger down payment and good credit can help secure a lower rate. Failure to repay can result in the lender repossessing the car.