The Substance of a Loan

1. How Much Can You Borrow?

3. When Do You Have to Repay?

Usually you request a specific loan amount. The lender can approve it, reject it, or offer you a smaller amount. Sometimes you need to apply to more than one lender to find one that will approve your request. You may have to pay an application fee each time.

The cost of a loan is determined by the amount you borrow, the term, and the annual percentage rate (APR) that the lender offers. However, you may be able to find a loan at a better rate if you investigate what various lenders are charging before you apply.

The terms of repayment are part of your loan agreement. In most cases, you pay interest and some of the principal on a regular schedule, usually once a month.

In many cases, you may have to pay a late fee if your payment arrives after the payment due date, and you should expect to be penalized if you send a payment check that is returned for nonsufficient funds (NSF), better known as a bounced check.

Whether you need a loan only occasionally or borrow on a more regular basis, you’ll be concerned with the same basic things:

The amount financed, or the principal, is what you borrow. However, you may not actually get the entire amount that is approved. That's because the lender will usually subtract any application fees, credit-check fees, or other costs of the loan from the amount you receive. In addition, the lender may require you to use part of the loan amount to pay off another loan or to purchase insurance to cover the loan if you should die.

Sometimes lenders are eager to lend, and offer lower rates or waive the fees. While you probably can't time your need to borrow to coincide with those occasions, some borrowers apply for home equity lines of credit when lenders promote them.

In some cases, including some college loans, you may pay only interest for a specific period and then begin to repay the principal. In others, you pay only interest for the term of the loan and then repay the entire principal in a lump sum. Most lenders allow you to prepay a loan at any time. Some charge a prepayment penalty, usually about 2% of the amount borrowed, although many states prohibit this practice.

Failing to live up to the agreement is called defaulting on the loan. The lender may have the right to repossess and sell the property you put up as collateral.

• The amount you’ll be able to borrow

The loan's term is a major factor, because the longer it is, the more interest you pay. Your goal should be to borrow no more than you need, at the lowest available APR, and with the shortest term over which you can afford to repay.

Lenders may also impose a stiff penalty if you default. And, if they hire a collection agency or lawyer, you'll have to pay for those services, too.

• How long you’ll have to repay

Another way lenders can collect if you default is by taking, or setting off, the amount owed from any checking or savings account you have with the lender.

• What the interest charges will be

Some loans have built-in limits. For example, if you borrow money to buy a car, the maximum you’re eligible for is determined by the price of the car. If you borrow to pay tuition, there is often a per-year or four-year total that you can finance. Home equity loans are generally capped at 80% of your equity, and loans in excess of $50,000 may be more difficult to arrange.

The interest rate you pay is affected by two key factors: the current rate for similar loans, which can vary widely from year to year, and your creditworthiness, which is determined by how you’ve used credit in the past. Higher scores usually mean you are able to borrow more easily at the lowest rates available.

Some loans have typical terms, such as 15or 30-year home mortgages. Most car loans last from 3 to 5 years. But avoid terms as long as 6 or 7 years. They tend to have higher interest rates and so cost more.

The Loan Agreement

When you take a loan, you’re committing yourself not only to repay, but to repay on a specific schedule. Those details are spelled out in the loan agreement, or loan note, a detailed document the lender provides. When you sign it, you’ve agreed to its terms and conditions. The fine print may be off-putting, but you should read it carefully. It explains exactly what you’re getting—and getting into.

It All Begins with the Application

Loan applications may vary, but they all ask for the same basic information:

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Check Your Credit Standing

Before applying for a loan, it’s smart to check your credit report with one of the three major credit reporting agencies—Experian, Equifax, or TransUnion—to confirm there’s no negative information that you should be prepared to explain.

You can access this information for free from each agency at www.annualcreditreport.com or by calling 877-322-8228. In fact, it’s a good idea to check your credit standing regularly, by rotating though the agencies so that you look at a different one every few months. The information isn’t identical from agency to agency, but major problems will show up on all three.

If you find errors, which do occur more often than you might think, you should work to have them resolved before applying for a loan. Each site explains the procedure to follow and what your rights are if those errors are not corrected.