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Borrowing Money

Learn how to responsibly borrow money.

You’ve probably taken out a loan before when you borrowed money from your parents to go out with friends, and then you paid them back later when you had the money. Or maybe a friend lent you a few bucks to buy a snack, or your brother or sister gave you some cash to buy a gift for your parents. Loans are an essential part of life—big or small, long- or short-term. It may be a while before you need to go to the credit union and take out a loan for yourself, but here’re a few things you should know and the kinds of loans you’ll probably see.

What is a loan?

A loan is borrowed money. A lender offers the money based on the borrower agreeing to certain terms. The borrower will agree to pay back the principal, the amount of the loan, plus interest, which is a percentage over the principal amount.

Many loans are secured with collateral. That is something the lender can keep or take if you don’t pay back the loan. In the case of a car loan, it’s usually the car. Student loans that you take out to pay for college tend not to have collateral (the lender can’t take away your education!).

Types of loans.kids playing

We’ve already talked about a few kinds of loans: student loans, and car loans. Most likely these will be the first loans you encounter in life. Some loans can only be used for specific things. Here’s a list of common loans and what they’re usedfor:

  • Student loans – These are for tuition, housing, and other school-related expenses.
  • Vehicle loans – To buy a car, pretty straightforward.
  • Mortgage – A loan to buy a house or property.
  • Small business loans – A loan to help you start a small business.
  • Credit cards – When you buy something on a credit card, the card company is loaning you the money to be paid back at the end of the month.
  • Home equity line of credit – Often referred to as a HELOC, these are loans against your home or property to be used to improve the home or other needs.
  • Personal loans – These are usually small loans that you can use as you see fit, maybe to cover an unforeseen repair bill.

To understand loans even better, you’ll want to know what collateral, principal, and interest are and how they work.

  • Collateral – Something you offer as a guarantee that you’ll pay your lender back. If you don’t pay, the lender can legally take whatever you offered as collateral to cover the unpaid loan (usually by the lender selling the item and keeping the money).
  • Principal – This is the initial amount of the loan. Principal means first in order of importance.
  • Lender – The giver of the money.
  • Borrower – The person borrowing money.
  • Mortgage – An agreement that the lender technically owns the property until the debt is paid.
  • Credit – The ability to obtain goods or services before payment. The more credit you have, the larger loans you’ll be able to get.

At some point in your life, you’re going to need a loan. It’s just part of life. Buying a car without a loan is possible, but hard to do. Buying a house is almost impossible without a loan. Establishing credit is important. Maintaining good credit is even more important. Taking out a loan you don’t need is only going to hurt you in the long run. If you want to know more, talk to someone at your credit union; they’ll be happy to help you find what you’re looking for.

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