Amazing Kids! Magazine

Understanding How to Take Loans

By Fatima Yousuf, Money Smarts Editor and Contributing Writer

 

Whether it be for attending college, buying a home, or starting a business, chances are that you will, at some point, need to take a loan. Thus, it is very important that you learn these skills now so that you are informed in the future.

The first step in taking a loan would be to find an institution to take it from. Some banks don’t offer student loans or business loans, so be sure to do research! If you are taking a student loan, be sure to go through your school’s student aid office before taking a private loan from a bank. Some of the most common places to take loans from are banks and credit unions. Each institution will have different interest rates, rules, and limits, so be sure to compare each offer before deciding on one.

Interest is money paid regularly at a certain rate for the use of money lent. If you are using simple interest, then your interest would be taken as a percentage of the initial deposit. For example, if you take $100 loan with a 10 percent monthly interest rate from a bank, then you would need to pay the $100 back, as well as $10 extra for each month you delay paying the money back. However, most banks use compounded interest, which uses interest rates as a percentage of the total money owed. For example, if you take a $100 loan from a bank with a 10 percent monthly interest rate, then you would owe a total of $10 extra for the first month you delay paying the loan, and then a total of $21 for the second month you delay paying the loan. (Ten percent of $110 is $11. Add $11 to the $10 you owed from the first month, and you would owe a total of $21.) If you are taking out a loan with compounded interest, you need to be able to pay back the loan as quickly as possible, or the money you owe will increase exponentially, and you will be deep in debt! The most important thing to remember is the that, when you are looking over loans, you must make sure to read ALL the conditions listed for taking the loan. You need to know exactly what you are getting into before you borrow the money; otherwise, you could get into deep trouble! The graph below shows the difference in money owed if you use simple interest as opposed to compounded interest. Notice that compounded interest increases at a much faster rate than simple interest.

One other thing to be careful of are collaterals. Basically, collaterals are what you give to a lender to make sure that, if you are unable to pay loans, then the institution is allowed to keep your possessions for its own. For example, if you agree to offer your car as a collateral and you are unable to pay your loan, then the bank is allowed to take your car and do what it wants with it. This is why you MUST read all the terms and conditions of a loan before taking one and be absolutely sure that you can pay it back; otherwise, you could lose everything.

Once you have decided on a loan, you can go to the institution and apply for the loan. You will need to provide information such as your credit score, which we will discuss in next month’s article, and tell the institution how much money you will take, what you will use it for, and more. Then, someone will look over your application and decide whether or not the loan is approved. The higher your credit score is and the smaller your loan is, the more likely you are to be approved. Other factors that go into whether or not your loan is approved are your employment history and income.

Taking loans certainly is a scary process, and if you are uninformed, then you could lose a lot. However, if you act smartly and are careful of how much money you are taking, as well as aware of all the terms and conditions, then you will be just fine!

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