Your quick guide to loans and getting credit

May 14, 2020

Get the lowdown on loans, interest and what types of credit are right for you.

Before you obtain credit — of whatever type — it’s important to understand the basics of the loan you’re getting into.

A loan is a contract between you and the lender, by which you receive money now with the expectation that you pay it back later, usually with interest included.

 

What is interest?

Interest is the amount of money the lender charges you for the use of its money. There are two types of interest rates.

  1. Fixed rate: The interest rate stays the same throughout the term of the loan. 
  2. Variable rate: The interest rate might change during the loan term, as written in the contract.

The rate is charged on the amount you have yet to pay back. So, for example, if you borrowed $1,000 with a fixed rate of 5 percent per year, you would need to pay 5 percent annually on the amount you still owe.

 

Key types of lending agreements

Generally speaking, there are three types of lending accounts.

  1. Revolving agreement: You have a choice: Pay part of the outstanding balance or pay the balance in full. If you pay in full, you pay no interest. Either way, the next month you can re-borrow up to the approved credit limit without having to reapply. A common example of this is a credit card. 
  2. Charge agreement: With a charge account, you promise to pay the full balance every month. This means you do not have to pay interest charges. Charge cards and charge accounts with local businesses often require repayment on this basis. 
  3. Installment agreement: You receive a lump sum and sign a contract to repay a fixed amount in equal payments over a specific period of time. Mortgages are a well-known example.
     

Understanding lender fees

In addition to interest, lenders may charge other fees. The Truth in Lending Act requires that these are disclosed in a clear and uniform manner: 

  • Amount financed: The amount of the loan provided to you.
  • Annual percentage rate (APR): The cost of your loan expressed as a yearly percentage rate. When shopping for loans, you should compare APRs, not interest rates, since APRs reflect the cost of interest and other finance charges.
  • Finance charge: The cost of your loan expressed in dollars. It includes items such as interest, service charges and loan fees. 
  • Total payments: The amount you will have paid after you have made all payments as scheduled.

 

How to get a loan: The common types of loans

Loan types range from a credit card to a home mortgage and everything in between:

  • Credit cards: When you use your credit card, the issuer is essentially extending you a short-term loan. If you carry a balance month to month, you’ll pay interest on your balance. Credit cards often also have fees for a variety of services. Make sure you understand what these are before you agree to a new card. 
  • Student loans: Federal student loans have a fixed interest rate, while private loans may have fixed or variable rates. The standard repayment period with federal loans is 10 years. When thinking about how to get a student loan, remember that you may qualify for grants and scholarships instead. 
  • Auto loans: Auto loans are generally only for a few years with a maximum term of 84 months. The car itself is used as collateral, so the lender may repossess it (take it back) if you can’t make your payments. 
  • Home mortgage: Mortgages may have a fixed or variable interest rate, with the home used as collateral. Failure to make mortgage payments may result in foreclosure. 
  • Home equity loan: You borrow against the equity you have in your home, usually a fixed amount of money repayable over a fixed period. Many people take out home equity loans for specific purchases or projects, like an addition to the existing home. Your home is used as collateral. 
  • Home equity line of credit: You borrow against the equity you have in your home in a form of revolving credit. You use the credit extended to you like you would with a credit card, but your home is used as collateral. The advantage over credit cards is that the rates are usually far lower.

 

What is your credit score?

Your credit score, or FICO score, ranges between 300 and 850. It gives lenders an idea of what kind of credit risk you might be. The higher your score, the more likely lenders will lend to you. 

Here's how your credit score is determined:

  • Past payment history: By paying your bills consistently on time, you can greatly improve your overall score. 
  • Amounts owed: How much debt are you taking on compared with the amount you’re allowed. Your score will be higher if you aren’t close to being maxed out.
  • Length of credit history: The longer you’ve been using credit, the better. Opening multiple new accounts in the hopes of building credit quickly may reduce your “average account age” and therefore reduce your score. Instead, open one account and build upon that credit over time. 
  • Applications for new credit: Every time you apply for new credit (cards or loans), that inquiry makes its way onto your credit report. If there have been too many inquiries on your report in a short period of time, it can lower your score. Some credit score models will allow for shopping around for a loan within a certain time period and count those inquiries as just one. 
  • Credit mix: Credit cards and installment loans (like car loans or your mortgage) are examples of different types of credit. Your FICO score will be higher if you have more than one type of credit in your history — and lower if you have only one type or none. 
     

It's important to research and understand what type of loan best fits your needs. Learn more about personal loans and lines of credit.

Related content

Evaluating interest rate risk creating risk management strategy

At your service: outsourcing loan agency work

For today's homebuyers, time and money are everything

How I did it: Bought a home without a 20 percent down payment

Money Moments: Tips for selling your home

Overcoming high interest rates: Getting your homeownership goals back on track

Should you buy a house that’s still under construction?

Everything you need to know about consolidating debts

10 ways to increase your home’s curb appeal

Avoiding the pitfalls of warehouse lending

What you should know about buying a car

Credit: Do you understand it?

Is it the right time to refinance your mortgage?

6 questions to ask before buying a new home

5 things to avoid that can devalue your home

What is a home equity line of credit (HELOC) and what can it be used for?

How to use credit cards wisely for a vacation budget

Your financial aid guide: What are your options?

Maximizing your infrastructure finance project with a full suite trustee and agent

Myth vs. truth: What affects your credit score?

8 steps to take before you buy a home

What is refinancing a mortgage?

Are professional movers worth the cost?

What to know when buying a home with your significant other

Mortgage basics: How does your credit score impact the homebuying experience?

Mortgage basics: 3 key steps in the homebuying process

Mortgage basics: Buying or renting – What’s right for you?

Mortgage basics: Prequalification or pre-approval – What do I need?

How you can take advantage of low mortgage rates

Mortgage basics: Finding the right home loan for you

Mortgage basics: What is refinancing, and is it right for you?

What’s your financial IQ? Game-night edition

A checklist for starting a mobility program review

Tips for realtors to help clients get their homeownership goals back on track

Common unexpected expenses and three ways to pay for them

Myths vs. facts about savings account interest rates

How to build and maintain a solid credit history and score

How do interest rates work?

How to request a credit limit increase

What you need to know before buying a new or used car

Housing market trends and relocation impact

How liquid asset secured financing helps with cash flow

An investor’s guide to marketplace lending

What is a CLO?

Beyond Mars, AeroVironment’s earthly expansion fueled by U.S. Bank

ABL mythbusters: The truth about asset-based lending

What type of loan is right for your business?

Collateral options for ABL: What’s eligible, what’s not?

Can ABL options fuel your business — and keep it running?

Evaluating interest rate risk creating risk management strategy

Tech lifecycle refresh: A tale of two philosophies

Changes in credit reporting and what it means for homebuyers

What’s the difference between Fannie Mae and Freddie Mac?

Why other lenders may be reaching out to your employees

High-cost housing and down payment options in relocation

4 benefits of independent loan agents

Middle-market direct lending: Obstacles and opportunities

Crypto + Relo: Mobility industry impacts

For today's relocating home buyers, time and money are everything

How to fund your business without using 401(k) savings

Costs to consider when starting a business

4 small business trends that could change the way you work

How jumbo loans can help home buyers and your builder business

When to consider switching banks for your business

5 tips to help you land a small business loan

Leverage credit wisely to plug business cash flow gaps

How to establish your business credit score

Good debt vs. bad debt: Know the difference

Student checklist: Preparing for college

The A to Z’s of college loan terms

Co-signing 101: Applying for a loan with co-borrower

Practical money skills and financial tips for college students

How to build credit as a student

How I did it: Paid off student loans

Pros and cons of a personal line credit

3 tips for saving money when moving to a new home

Personal loans first-timer's guide: 7 questions to ask

5 tips to use your credit card wisely and steer clear of debt

6 ways to spring clean your finances and save money year-round

Is a home equity loan for college the right choice for your student

Parent checklist: Preparing for college

How to apply for federal student aid through the FAFSA

What to consider before taking out a student loan

Are you ready to restart your federal student loan payments?

5 tips to use your credit card wisely and steer clear of debt

5 steps to selecting your first credit card

How to use debt to build wealth

What’s a subordination agreement, and why does it matter?

Understanding the true cost of borrowing: What is amortization, and why does it matter?

Know your debt-to-income ratio

Your quick guide to loans and obtaining credit

Dear Money Mentor: How do I begin paying off credit card debt?

Dear Money Mentor: What is cash-out refinancing and is it right for you?

Crypto + Homebuying: Impacts on the real estate market

How I did it: Bought my dream home using equity

Saving for a down payment: Where should I keep my money?

Your guide to breaking the rental cycle

What are conforming loan limits and why are they increasing

The lowdown on 6 myths about buying a home

Money Moments: How to finance a home addition

First-time homebuyer’s guide to getting a mortgage

Dear Money Mentor: When should I refinance a mortgage?

10 questions to ask when hiring a contractor

What is an escrow account? Do I have one?

These small home improvement projects offer big returns on investment

Should you get a home equity loan or a home equity line of credit?

Mortgage basics: What’s the difference between interest rate and annual percentage rate?

Is a home equity line of credit (HELOC) right for you?

How to use your home equity to finance home improvements

How do I prequalify for a mortgage?

Home equity: Small ways to improve the value of your home

Can you take advantage of the dead equity in your home?

4 questions to ask before you buy an investment property

10 uses for a home equity loan

Improving your credit score: Truth and myths revealed

6 essential credit report terms to know

5 unique ways to take your credit card benefits further

Test your loan savvy

Decoding credit: Understanding the 5 C’s

Should you give your child a college credit card?

U.S. Bank asks: What do you know about credit?

What types of credit scores qualify for a mortgage?

What is a good credit score?

How to improve your credit score

Take the stress out of buying your teen a car

Questions to ask before buying a car

How to choose the best car loan for you

Disclosures

Start of disclosure content

Loan approval is subject to credit approval and program guidelines. Not all loan programs are available in all states for all loan amounts. Interest rate and program terms are subject to change without notice. Mortgage, Home Equity and Credit products are offered through U.S. Bank National Association. Deposit products are offered through U.S. Bank National Association. Member FDIC.