Understanding Credit & Loans

1. What is Borrowing? (Loans & Credit Cards)

Borrowing means taking money from a lender (such as a bank or financial institution) with the promise to repay it later, often with added interest. Borrowing can be done through different financial products:

Types of Borrowing:

• Loans – A sum of money borrowed from a bank, credit union, or lender that must be repaid over time with interest. Loans can be used for education, buying a house, a car, or starting a business.

• Credit Cards – A form of short-term borrowing that allows users to make purchases up to a certain limit and repay the amount later, either in full or in installments with interest.

• Overdrafts – A facility that allows individuals to withdraw more money than they have in their bank account, up to a pre-approved limit.

• Buy Now, Pay Later (BNPL) – A financing option that lets consumers buy items and pay for them in installments without immediate payment.

Understanding these borrowing options helps in choosing the right financial tool based on needs and repayment capacity.

3. Repayment Responsibility and Interest Rates

Borrowing money comes with the responsibility to repay it on time. Failing to do so can lead to financial penalties, increased debt, and a negative credit score.

Key Aspects of Repayment:

• Loan Repayment Terms – Borrowers must repay the loan in fixed monthly installments over a specific period.

• Minimum Payments on Credit Cards – Paying only the minimum amount on a credit card can lead to long-term debt due to high-interest rates.

• Late Payment Penalties – Missing loan or credit card payments can result in penalties and increased interest charges.

Understanding Interest Rates:

• Interest is the extra cost charged by lenders for borrowing money. The higher the interest rate, the more expensive it is to borrow.

• Fixed vs. Variable Interest Rates – Fixed rates remain the same throughout the loan term, while variable rates fluctuate based on market conditions.

• Compound Interest – Interest charged on both the principal and previously accrued interest, making loans more expensive over time.

• APR (Annual Percentage Rate) – A standardized way to compare loan costs, including interest rates and additional fees.

Tips for Responsible Borrowing:

• Borrow only what is necessary and within your repayment capacity.

• Make timely payments to avoid late fees and maintain a good credit score.

• Compare interest rates before taking a loan to get the best deal.

• Avoid unnecessary debt by distinguishing between wants and needs.