What's in a loan

The reason for having credit is to get a loan when you need it. A loan can be large or small; It can be instantly available through a card or it can require your signing a complicated set of documents. And although different kinds of loans come with different terms, virtually every credit agreement covers four key points:

How much you can borrow
The amount you borrow is called the "principal." Sometimes you borrow the principal all at once. Other times, with credit cards for example, you have a "line of credit" that lets you borrow up to your "credit limit" at any time.

With credit cards and charge cards (where you pay in full each month and aren't charged interest), any principal you repay becomes available to be borrowed again-as long as your credit remains in good standing. This agreement to let you borrow, repay, and borrow again is called "revolving credit."

In a loan document on most card statements, you may see the words “amount financed.” It simply means the amount you borrowed.

How much it will cost
The most common cost of a loan is the interest (sometimes called a "finance charge"). Usually, your payments are split—part goes to repay what you borrowed and part goes to pay the interest.

There may also be fees of various kinds. Many card issuers charge annual fees similar to dues) that they sometimes waive for special promotions or upon request. Many also charge fees for cash advances. Lenders of mortgages usually charge upfront interest called "points" and other, connected fees for appraisals, closing costs, and more.

Every lender is required to show you the annual percentage rate (APR). It takes into account the interest plus certain fees to show the actual cost of the loan for the first year.

The payment plan
A payment plan has three parts: the length of time you're given to repay the loan, the schedule of payments, and the amount of each payment.

Charge card issuers give you the shortest time-3o or 6o days. Mortgage lenders give you the longest-up to 30 years. Credit card issuers let you take as long as you like, if you always make the minimum payment required.

Although there are many different repayment schedules, the most common is once a month. Your payment amounts may be "fixed" (stay the same each time) or "adjustable" (change according to a formula at periodic intervals.

What if you don't repay
Failing to repay on schedule can put you in default. The lender is then faced with finding another way to be repaid. If your credit report shows you to be a risk, the lender will want "security." In a secured loan, you give the lender the right to sell specific property (called the "collateral") if you default. In this way, you give the lender a sense of security, which makes it easier for him or her to say "yes" to the loan.

Usually, the collateral is the property you're buying with the loan, such as a car, home, or large household item. But lenders can also ask borrowers to pledge an unrelated item of value. (The item chosen is negotiable, and you have to weigh the risk of losing that item against your need for the loan. The law also protects you from being forced to pledge certain necessities.)

By law

• Limits on security. By law, creditors can't ask you to pledge as security any clothes, furniture, or other personal belongings unless they're the actual items you're buying on credit. Also, if your car is repossessed, you're entitled to anything left in it (although you may only have this right if you call within 24 hours).