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