In this lesson, you'll learn:

• How to compare loan interest rates and terms.
• The benefits of paying off loans early.
• The reasons to avoid payday loans and how to spot predatory lenders.

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.

Save Money by Paying Off Loans Early

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.

Betty wants to reduce the overall cost of her car loan.

Betty wants to reduce the overall cost of her car loan.

Betty wants to reduce the overall cost of her car loan.

Betty wants to reduce the overall cost of her car loan.

Betty wants to reduce the overall cost of her car loan.

This is how shorter terms with higher payments will affect the total cost (including interest) of Betty's $15,000 car loan:

• Loan Cost Comparison

• 3-Year Term

• Interest rate

  8.0%

• Payment amount

  $470

• Total paid

  $16,922

• 4-Year Term

• Interest rate

  8.0%

• Payment amount

  $366

• Total paid

  $17,577

• 5-Year Term

• Interest rate

  8.0%

• Payment amount

  $304

• Total paid

  $18,249

Beware the Perils of Payday Loans and Other High-Cost Credit

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.

Beware of Predatory Lenders

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.

Pauline needed financial help and fell victim to a predatory lender.

Pauline needed financial help and fell victim to a predatory lender.

Pauline needed financial help and fell victim to a predatory lender.

Pauline needed financial help and fell victim to a predatory lender.

Pauline needed financial help and fell victim to a predatory lender.

Fortunately, Pauline's children discovered her situation and paid off the loan.

The lessons here are:

• Don't borrow from Peter to pay Paul.
• Never respond to a solicitation that makes borrowing sound easy and cheap.
• Always read the fine print on any loan application.
• Seek assistance from family members, local nonprofit credit-counseling services or others to make sure a loan is right for you.

Lessons Learned

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.