What Is a Loan?

A loan is money that is provided to you now that you must repay later.

Typically, lenders will give you a single immediate payment. In return you will be expected to send them smaller payments each month.

Because prices usually rise over time, a dollar you pay back several years from now does not buy as much as a dollar today. That’s one main reason most lenders lenders typically charge interest. Interest also covers lenders’ other costs such as insurance, telephone help lines, etc.

Interest is a fee added (typically added yearly or monthly) to the debt. For example, a standard federal Stafford “unsubsidized” student loans charged an annual interest rate of 6.8 percent in 2010. So for every $1,000 you borrow, under the standard repayment plan, you’d have to repay about $11.50 a month, for a total of about $1,380, to pay it off in 10 years. (Federal student loans offer many different repayment options, however.)

Many students are afraid of borrowing for college because they’ve heard of friends who have had lives ruined by borrowing too much. Generally, it is wise to avoid or greatly restrict borrowing. But if borrowing is the only way you can obtain your degree, it is probably a worthwhile risk. While a college diploma is no guarantee of a good job, and you may be one of the unlucky graduates who ends up driving a cab, many employers require college degrees for the best jobs. On average, college graduates earn about $20,000 more a year than those whose education ended at high school.  Reed more……