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Borrowing Besties:
Learning the Lingo of Loans

APEF: Solving the Financial Illiteracy Crisis

The word "loan" might conjure negative images of stressed adults dealing with debt, but there’s no reason to fear! Used wisely, loans can be powerful tools for achieving various goals, such as pursuing education, buying a car, or even homeownership. However, it's essential to approach borrowing cautiously and make informed decisions. This article aims to provide you with a comprehensive guide to borrowing, empowering you to navigate the world of loans wisely.

Loan Lingo: 

  • Principal: The amount you borrow.

  • Interest: The fee you pay for borrowing the money. 

  • Interest rate: The percentage of the principal you pay in interest (in other words, the cost of borrowing). Understanding interest rates is crucial when borrowing money; it can significantly impact the total amount repaid. Fixed-rate loans maintain a constant interest rate, while variable-rate loans may change over time.

    • Important note: Your credit score plays a pivotal role in borrowing. Lenders use it to assess your creditworthiness and determine the interest rate you qualify for. Building and maintaining a good credit score is essential for favorable borrowing terms like lower interest rates.

  • Term: These define how long you have to repay the loan. Shorter terms often mean higher monthly payments but lower overall interest costs. Longer terms may result in lower monthly payments but can lead to paying more in interest over the life of the loan.

  • Collateral: An asset you pledge to secure the loan. 

  • Loan Fees: Be aware of any fees associated with borrowing, such as origination fees, application fees, or prepayment penalties. These fees can add to the overall cost of the loan.

Types of Loans: 

  • Student loans: Designed for educational expenses, student loans help cover tuition, books, and living costs. Federal student loans typically offer favorable interest rates and flexible repayment options.

  • Auto loans: Auto loans are used to finance a vehicle purchase. They come with a predetermined repayment period and interest rate, and the vehicle itself often serves as collateral.

  • Personal loans: Personal loans are versatile and can be used for various purposes, such as consolidating debt, covering unexpected expenses, or funding a personal project. Remember- interest rates may vary based on creditworthiness.

  • Mortgages: These are large loans that help you buy a house or property. 

  • Credit Cards: While not traditional loans, credit cards allow you to borrow money up to a specific limit. It's important to pay attention to interest rates, fees, and timely repayment to avoid accumulating debt or hurting your credit score (making it more challenging to get loans in the future!)

Remember:

  • Borrow only what you can afford to repay: Before taking out a loan, create a budget that includes monthly repayment amounts. Ensure you can comfortably afford the repayments without compromising your essential living expenses.

  • Compare interest rates and terms: Shop around for the best deal; don’t take the first offer you get! Savvy borrowers find the most favorable terms and low-interest rates.

  • Read the fine print: Understand all the fees and conditions before signing any agreements- they can add up!

  • Build credit responsibly: On-time loan repayments strengthen your financial history, making future borrowings easier.

 

Loans can be valuable tools, but remember, they're not free money. They require careful planning, responsible borrowing, and a commitment to repayment. You should approach borrowing with a clear understanding of the types of loans available, interest rates, repayment terms, and the impact on your overall financial well-being. By making informed decisions, you can build a solid foundation for financial success in the future. 

Bonus Tip: Use online loan calculators and financial planning tools to estimate monthly payments and understand the long-term impact of borrowing. Remember, the path to financial security starts one informed step at a time!

Soft skills refer to a set of personal attributes, behaviors, and social attitudes that enable individuals to interact effectively with others in a workplace or social environment. These skills are essential for building healthy relationships, communicating effectively, solving problems, and collaborating with others.

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