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What is a Loan and Why Would I Need One?

Have you asked your parents for a loan so you could buy something you really wanted?  Maybe your favorite music group just released a new CD, and you don’t quite have enough cash on hand to buy it.  You ask your parents if they will loan you $20 so you can buy it right away.  Then you use the money from your next paycheck or allowance to pay your parents back.

People take out loans from financial institutions for cars, college tuition, a house, a boat or other large items.  Following are some important loan terms to understand:

The Principal.  No, this is not the principal of your school.  This is the amount of money you borrow.

The Interest.  This is the amount of additional money you agree to pay the financial institution for using their money.  When you sign a loan agreement, you agree to repay the principal plus an additional amount (interest) for the use of the financial institution’s money.

Time to Repay or Term of the Loan.  This is the payback period, or the amount of time you have to repay the loan.  For a car, this may be as much as 5 or 6 years.  For a house, the time to repay may be up to 30 years.

As a loan is repaid, credit history is established.  This credit history stays with the borrower in the future.  Borrowers need to meet their payment obligations so their credit history is favorable.  Borrowers also need to be sure they don’t borrow more money than they can repay.  This will help them to protect their credit history in the future.

You’re never too young to get into good borrowing habits.  Make sure you repay anyone you borrow from in the amount of time you agree upon.  Establishing good borrowing habits will benefit you in the future!

Posted: 8/26/2012 with 0 comments

Categories: Buying a Car, Credit, Education, Students

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