Credit Can Be a Great Financial Tool if Used Properly

Buying on time, or paying for something while you’re using it, was introduced by Isaac Singer in 1856 as a way to sell his sewing machines. At $5 down and $5 a month, the average family could afford a $125 machine—otherwise impossible on a typical $500 annual income.

When you need money to buy a car, pay college tuition, fix up your home, or for anything else that requires an immediate cash outlay, you are often able to borrow the amount from a lender such as a bank or a credit union. If you know how different types of loans work and the particular features they offer, you will be in a better position to look for the one that will be best suited for you.

In some ways, of course, all loans are alike. You borrow money, called the principal, and agree to pay it back over a specific term, or length of time, with interest. But the conditions of the loan can affect how much you can borrow and how much the loan will cost you. Some common conditions include: Paying in installments or in a lump sum, whether the interest charged is fixed or adjustable or whether the loan is secured or unsecured.

When you take an installment loan, you
 borrow the money all at once and repay
it in set amounts, or installments, on
a regular schedule, usually once a
month. Installment loans are also called
 closed-end loans because you must pay
them off by a specific date. Secured loans use collateral that you provide. It could be property that you put up for security. The lender can sell the property if you default. Car loans and home equity loans are the most common types of secured loans. An unsecured loan is made solely on your promise to repay. If the lender thinks you’re a good risk, nothing but your signature is required. However, the lender could require a cosigner, who promises to repay of you don’t. Since unsecured loan pose a bigger risk for the lender, the may have higher interest rates and stricter conditions for the loan. Never be a cosigner on a loan unless you’re willing to pay the loan off yourself. Credit can be a great economic tool in the hands of a good financial steward.

Contributions from the book Credit & Borrowing in this press release are used with permission from Light Bulb Press.