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Loan Basics

A loan is a contract between a borrower and a lender, allowing the borrower to receive a set amount of money (the principal) that must be paid back in the future. Loans can be tailored based on different factors, and with so many options available, it can be daunting to choose. The key factors are usually the term and the monthly payment amount, which are separated by tabs in the calculator provided.

Fixed Term Loans

Mortgages, auto loans, and other similar lending options typically use a time-based repayment approach. The choice between 30-year, 15-year, or other mortgage terms is crucial, impacting long-term financial aspirations. Some considerations include:

• Opting for a shorter mortgage due to uncertain long-term job prospects or a preference for reduced interest with significant savings.
• Choosing a longer mortgage term to coincide with Social Security retirement benefits.

Our Payment Calculator can help navigate these considerations, also aiding in decisions related to car financing, ranging from 12 to 96 months. Although many opt for longer terms for reduced monthly payments, the shortest term often results in the least amount paid overall. For more on mortgages or auto loans, see the Mortgage or Auto Loan Calculator.

Fixed Monthly Payment

This method calculates the duration needed to clear a loan, especially for debts on credit cards. If you can spare extra money monthly, you can determine how soon your loan can be cleared by adding to the "Monthly Pay" of the calculator. Occasionally, the calculated monthly payment might not be sufficient to cover both the principal and interest. Adjust the "Loan Amount," "Monthly Pay," or "Interest Rate" as needed.

Understanding Interest Rates

It's crucial to differentiate between the interest rate and the Annual Percentage Rate (APR). The interest rate is the borrowing cost of the principal loan amount. In contrast, APR includes other charges like broker fees, discount points, and more. If no additional fees are tied to a loan, the interest rate equals the APR. For insights on APR or interest rates, consult the APR or Interest Rate Calculator. Use the APR for a comprehensive loan cost, and the interest rate for details without other costs.

Choosing Between Variable and Fixed

Loans usually come with either variable or fixed interest rates. While most loans like mortgages, auto loans, or student loans have fixed rates, adjustable-rate mortgages, home equity lines of credit, and some personal and student loans might have variable rates. For specifics on these loans, refer to the Mortgage, Auto Loan, Student Loan, or Personal Loan Calculator.

Insights on Variable Rates

Variable rate loans' interest might change based on factors like inflation or central bank rates. The key index rate set by institutions like the U.S. Federal Reserve or the London Interbank Offered Rate (Libor) often guides these rates.

Variable rates can alter regular payment amounts. Some lenders might cap rates to a maximum, regardless of index rate fluctuations. Rate changes don't always immediately reflect on variable loans.

Credit cards can either have fixed or variable rates. Borrowers with excellent credit might negotiate better rates on their variable loans or credit cards. To understand more about credit card payments, refer to the Credit Card or the Credit Cards Payoff Calculator.