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

Common small business banking questions, answered

3 signs it’s time for your business to switch banks

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

How to maximise your infrastructure finance project

4 benefits of independent loan agents

Changes in credit reporting and what it means for homebuyers

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

Good debt vs. bad debt: Know the difference

6 essential credit report terms to know

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

Know your debt-to-income ratio

How to apply for federal student aid through the FAFSA

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

How jumbo loans can help home buyers and your builder business

Your guide to breaking the rental cycle

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

Practical money skills and financial tips for college students

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

Myth vs. truth: What affects your credit score?

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

The A to Z’s of college loan terms

5 tips to help you land a small business loan

Take the stress out of buying your teen a car

What’s your financial IQ? Game-night edition

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

A checklist for starting a mobility program review

Opening a business on a budget during COVID-19

Are professional movers worth the cost?

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

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

Be careful when taking out student loans

What types of credit scores qualify for a mortgage?

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

What is an escrow account? Do I have one?

What is a good credit score?

What is a CLO?

Hybridization driving demand

How I did it: Paid off student loans

Money Moments: How to finance a home addition

Private equity and the full-service administrator

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

How to choose the best car loan for you

10 ways to increase your home’s curb appeal

High-cost housing and down payment options in relocation

How a small business is moving forward during COVID-19

Tech lifecycle refresh: A tale of two philosophies

When to consider switching banks for your business

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

How do interest rates affect investments?

How to use credit cards wisely for a vacation budget

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

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

At your service: outsourcing loan agency work

Why other lenders may be reaching out to your employees

Dear Money Mentor: When should I refinance a mortgage?

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

How to build and maintain a solid credit history and score

How to build credit as a student

Evaluating interest rate risk creating risk management strategy

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

Avoiding the pitfalls of warehouse lending

An investor’s guide to marketplace lending

How to choose the right rewards credit card for you

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

Prioritizing payroll during the COVID-19 pandemic

Should rising interest rates change your financial priorities?

Middle-market direct lending: Obstacles and opportunities

6 questions to ask before buying a new home

What you should know about buying a car

Your financial aid guide: What are your options?

How to get started creating your business plan

Webinar: Mortgage basics: How much house can you afford?

These small home improvement projects offer big returns on investment

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

Is it the right time to refinance your mortgage?

5 things to avoid that can devalue your home

Credit: Do you understand it?

5 unique ways to take your credit card benefits further

Is it cheaper to build or buy a house

What are conforming loan limits and why are they increasing

How I did it: My house remodel

How do I prequalify for a mortgage?

8 steps to take before you buy a home

First-time homebuyer’s guide to getting a mortgage

Home buying myths: Realities of owning a home

Improving your credit score: Truth and myths revealed

Common unexpected expenses and three ways to pay for them

Myths vs. facts about savings account interest rates

Leverage credit wisely to plug business cash flow gaps

For today's homebuyers, time and money are everything

How to use debt to build wealth

Housing market trends and relocation impact

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

Crypto + Relo: Mobility industry impacts

How I did it: Deciding whether to buy an RV

Streamline operations with all-in-one small business financial support

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

The lowdown on 6 myths about buying a home

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

Money Moments: Tips for selling your home

Parent checklist: Preparing for college

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

Quiz: How prepared are you to buy a home?

How to establish your business credit score

How I did it: Bought my dream home using equity

Buying a home Q&A: What made three homeowners fall in love with their new home

10 questions to ask when hiring a contractor

How you can take advantage of low mortgage rates

4 questions to ask before you buy an investment property

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

10 uses for a home equity loan

How to use your home equity to finance home improvements

What to know when buying a home with your significant other

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

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

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

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

Webinar: Mortgage basics: Finding the right home loan for you

Webinar: Mortgage basics: 3 Key steps in the homebuying process

What is refinancing a mortgage?

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

Student checklist: Preparing for college

Webinar: Uncover the cost: College diploma

Everything you need to know about consolidating debts

5 steps to selecting your first credit card

Your quick guide to loans and obtaining credit

Test your loan savvy

Should you give your child a college credit card?

How to improve your credit score

Decoding credit: Understanding the 5 C’s

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

ABL mythbusters: The truth about asset-based lending

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

Crypto + Homebuying: Impacts on the real estate market

How liquid asset secured financing helps with cash flow

When small companies buy big: The potential of asset-based lending

Questions to ask before buying a car

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

Costs to consider when starting a business

How to establish your business credit score

Investing in capital expenditures: What to discuss with key partners

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

What type of loan is right for your business?

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 by U.S. Bank National Association. Deposit products are offered by U.S. Bank National Association. Member FDIC.