3.2 Loans

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What is a loan?

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A loan is a sum of money borrowed from a lender that is expected to be paid back with interest over a specified period.

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What is interest in the context of loans?

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Interest is the cost of borrowing money, usually expressed as a percentage of the loan amount, which the borrower pays to the lender.

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What is a lending institution?

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A lending institution is an organization that extends loans to borrowers, making a profit by charging interest. Examples include banks, credit unions, and finance companies.

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What is a cosigner?

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A cosigner is a person who signs a promissory note along with the borrower and agrees to pay back the loan if the borrower defaults.

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What is life insurance in relation to loans?

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Life insurance is a type of insurance that pays a specified amount upon the policyholder’s death, often required by creditors to cover the loan in case the borrower dies.

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What is a wage assignment?

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A wage assignment is a voluntary deduction from an employee’s paycheck used to pay off debts.

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What is a balloon payment?

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A balloon payment is a large final payment due at the end of a loan, which is significantly larger than the preceding payments.

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What is a prepayment penalty?

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A prepayment penalty is a fee charged to a borrower for paying off a loan before its scheduled maturity date.

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What is a promissory note?

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A promissory note is a written promise to pay a specified amount of money to a specified person at a specified time.

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What is the principal in a loan?

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The principal is the original sum of money borrowed in a loan, excluding interest.