Module 5 of 7 12 min
Types of Loans
Installment vs. revolving: auto, student, personal, and home loans.
Course lessons
Step 1
The lesson
Credit cards are revolving credit. Most other loans are installment loans: you borrow a set amount, then repay it in equal payments over a set time.
Key term
Principal and term
The principal is the amount you borrow. The term is how long you have to repay it — for example, 60 months.
- Auto loans — for a car. The car secures the loan.
- Student loans — for education. Federal student loans have protections and repayment options that private loans usually don't.
- Personal loans — for almost anything. Usually unsecured, so rates depend heavily on your credit.
- Mortgages — for a home. The home secures the loan, and terms are often 15 or 30 years.
Key term
Secured vs. unsecured
A secured loan is backed by something the lender can take if you stop paying — like repossessing a car. An unsecured loan isn't, so it usually costs more.
The key tradeoff is term. A longer term makes each payment smaller but costs more interest in total. Compare loans by APR and total cost, not just the monthly payment.
Step 2
See it
For a $20,000 loan at 7% APR, a 3-year term costs about $2,232 in interest, a 5-year term about $3,761, and a 7-year term about $5,356.
Step 3
Real-world example
"What monthly payment works for you?"
At a car dealership, a salesperson asks Alex what monthly payment fits the budget. Alex says $300.
The dealer finds a way: a 7-year loan on a $20,000 car at 7% — about $302/month. It fits. But the total interest is about $5,356, compared with $2,232 on a 3-year loan.
A better approach: decide on a total price first, get pre-approved by a bank or credit union so you know your rate, and choose the shortest term you can comfortably afford.
Step 4
Try it: loan calculator
Change the term from 3 to 7 years and watch the monthly payment and total interest move in opposite directions.
Your numbers
Results
Monthly payment
$396.02
60 payments at 7% APR
Amount borrowed
$20,000
Total interest
$3,761
16% of what you pay
Total of payments
$23,761
- Principal (amount borrowed) $20,000
- Interest $3,761
Show year-by-year breakdownHide breakdown
| Year | Principal | Interest | Balance left |
|---|---|---|---|
| 1 | $3,462 | $1,290 | $16,538 |
| 2 | $3,712 | $1,040 | $12,826 |
| 3 | $3,981 | $772 | $8,845 |
| 4 | $4,268 | $484 | $4,577 |
| 5 | $4,577 | $175 | $0 |
Educational calculator, not financial advice. Results are hypothetical estimates based on the numbers you enter.
Step 5
Knowledge check
Answer each question, then check your answer to see the explanation. Retake it as many times as you like.
Question 1 of 3
Step 6
Summary
Installment loans have a fixed amount, fixed payments, and an end date. Secured loans are backed by collateral; unsecured loans aren't and usually cost more. Longer terms lower the payment but raise the total cost. Compare APR and total cost, and be careful about co-signing.
Step 7
What you should remember
- Installment loans: fixed amount, fixed payments, set end date.
- Secured loans have collateral that can be taken if you don't pay.
- Longer term = smaller payment, more total interest.
- Shop by APR and total cost, not monthly payment.
- Co-signers are fully on the hook.
Finished the lesson?
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