Intro to Loans and Credit

Personal Finance: An Intro to Loans and Credit

Watch the video and listen for the definitions to your 3 key terms. https://www.youtube.com/watch?v=fuiiJuB7tJs

Key Terms and Definitions

Principal

the money you initially borrowed and have agreed to pay back

Interest

the cost of borrowing the principal

(can be a fixed or variable rate)

Term Rate

the amount of time given to pay back a loan

(the shorter the term the faster the loan will be paid back, the longer the term the more interest you will eventually pay)

Benefits of Short-Term Loans

• they typically have lower interest rates

• because they're paid off quicker the borrower pays less in interest

Let's Practice

• Imagine you're buying a new car and you take out a five year loan of $20,000 at a fixed interest rate of 5%.

• You agree with the lender to make regular monthly payments.

• Now let's google "car loan calculator" and input the numbers.

• How much do you pay in total? And how much of that is interest? Figure this out before looking at the answer below.

• If you said a total of $22,645 total and $2,645 in interest you were correct!

Your Turn

• Let's imagine you have a line of credit of $30,000 to buy a car.

• Using cars.com find a vehicle you'd like to purchase and record the cost of the vehicle on your worksheet.

• Then use the car loan calculator to determine the total cost of your loan at a fixed rate of 6%. Record these numbers on your worksheet.