Loans can help you make some important purchases in your life, but choosing the one with the right terms and interest rates is key.
In this lesson, you'll learn:
If you have good credit, you may want to take out a loan to purchase a car, or house or to cover educational expenses — all three are investments in the future.
But regardless of how the money is spent, a loan is a liability, or debt, and decreases your wealth. So choose loans carefully.
Shop and negotiate for the lowest interest rate. The interest you save can be invested to build wealth.
It may be obvious that you should choose the loan with the lowest rate.
What's not obvious is that your credit score may determine which interest rate you are offered.
You can save interest expense by increasing your monthly payments or choosing a shorter payment term on your loan.
Betty, the planner, is shopping for a new car and needs a loan to pay for it.
She knows her new car will cost more than the sticker price because she will have to pay interest on the loan from the bank.
This is how shorter terms with higher payments will affect the total cost (including interest) of Betty's $15,000 car loan:
Try for yourself. Compare interest rates and loan terms:
Here's how the loan rates and terms compare for a 0 loan:
People can get deep in debt when they take out a loan against their paycheck.
They write a postdated check in exchange for money. When they get paid again, they repay the loan, thus the name payday loan.
These loans generally come with very high, double-digit interest rates.
Borrowers who can't repay the money are charged additional fees for an extension, which puts them even deeper in debt.
Borrowers can continue to pay fees to extend the loan's due date indefinitely, only to find they are getting deeper in debt because of the steep interest payments and fees.
Predatory lenders often target people by phone, by mail or in person who may be struggling financially.
After her husband died, 73-year-old Pauline got plenty of solicitations from finance companies.
She was struggling to make ends meet on her fixed income.
Fortunately, Pauline's children discovered her situation and paid off the loan.
The lessons here are:
You've now learned how to choose loan terms that will fit within your budget and meet your financial goals.
Be wary of loans that seem too good to be true from predatory lenders.
In the next lesson, you'll learn more about keeping on top of your debt and protecting your identity.