Borrowing it
You know the basic concept of borrowing: someone lends you money so you can buy something today and pay for it later. You’ve probably even had some experience with borrowing money from friends, parents or relatives. But your parents probably don’t expect you to repay more money than you borrowed to compensate them for loaning you cash. When you borrow money out in the real world, it’s a whole different story. You’ll be charged interest—an additional amount, usually calculated monthly as a percentage of the original loan—for the privilege of borrowing.
Loans you might need when you’re older
You must go through an application process to get a loan, mainly because lenders try to eliminate risk by assessing your background and ability to pay. To ensure you pay them back, lenders often ask for some type of collateral or security (something they can take possession of if you don’t pay). Since some loans cost more than others, you would be wise to shop around for the loan that best suits your needs. Here are a few of the most common types:
• Mortgage: A loan specifically for buying a house or other real estate. In this case, the collateral is the house itself. If you fail to pay, your house can be repossessed.
• Personal loan: You sign a contract to borrow money for, say, your education, a wedding or home renovations. You agree to repay the money over time in pre-determined amounts. If you have no income of your own yet (for example, if you’re borrowing money for higher education) the bank will ask your parents to secure the loan by co-signing for it. They will be on the hook if you don’t repay the money.
• Line of credit (LOC): A line of credit from the bank is a preapproved loan for a set amount (often secured against a house or other assets). You can dip into it any time, but you only pay interest when you use it. Once you borrow money, you have to make regular minimum payments, but you can repay it faster if you want.
• Payday loan: A payday loan is one of the most expensive ways to borrow. Typically, the cost is based on a set dollar amount per $100 borrowed—for instance, $21 per $100. That may not sound like much, but it represents an annual percentage rate (APR) of 546 per cent. If borrowers cannot repay their loans in full and on time, they usually face additional fees such as penalties and non-sufficient-funds charges. You’re best to avoid payday loans.