Borrowing Money In Plain English

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Duration: 3 minutes and 47 seconds

Country: United States

Language: English

License: CC - Attribution Non-commercial No Derivatives

Genre: Instructional

Producer: Common Craft, LLC

Director: Lee LeFever

Views: 1,344 (268 embedded)

Posted by: leelefever on Jan 19, 2009

A short explanation of the risks and benefits of borrowing money from a bank or financial institution.

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Sometimes we don’t have the money we need to accomplish a goal.
Borrowing money can help,
but if we aren’t aware of how the system works,
it can create bigger problems for us.
This is Borrowing Money in Plain English.
Among friends, borrowing money seems easy – you just pay them back.
However, we sometimes need to borrow a large amount of money from a financial institution,
maybe for a home, a car, or education.
Understanding how these relationships work
is a key to being responsible with your money.
Let’s say you need to borrow $10,000 from a bank.
As long as you meet their requirements,
the bank is happy to loan you this money because when you pay it back,
you’ll have to pay a fee.
This is how the bank makes money.
It’s called “interest.”
When you borrow money,
the interest you pay is usually a percentage of the total you borrowed.
This percentage is called the “Interest Rate.”
You’ll see this rate referred to as the Annual Percentage Rate or APR,
which is the interest and fees you’ll pay over a year for borrowing money.
Let’s see how this works for Rachel.
She’s a musician who needs to borrow $10,000 to produce her new album.
$10,000 plus interest is a lot of money to pay back,
but she doesn’t have to do it all at once.
To make it more affordable, she pays it back in monthly payments.
Each month, she’s paying back part of the money she borrowed
plus part of the interest.
It adds up over time.
This way, Rachel can see if she can afford to pay back the loan on a monthly basis.
She found one loan that had a 5% APR with a 1 year timeframe.
To pay it back, she would have had payments of $856 per month.
It was too much!
With what Rachel earns she would run out of money in just six months.
To avoid serious problems and owing even more money,
she kept looking.
Eventually, she found the right loan for her -
a lower APR and longer timeframe.
She found that spreading the payments across a longer timeframe
meant less to pay each month.
Before signing on the dotted line,
she was careful to understand all the terms of her loan.
She learned that some interest rates could change during the loan
which could impact her monthly payments.
Because she had a fixed budget,
she made sure the interest rate for her loan wouldn’t change.
While Rachel was asking questions,
she learned the rules as well,
because breaking the rules can cause an affordable loan
to become a big headache.
For instance, if she pays late,
she may owe the bank more money.
She made a promise to herself
to pay on time and avoid any late fees.
It was wasteful.
It was clear to Rachel that without care, problems could snowball.
Changing APRs and late fees
could have made her loan impossible to afford.
Because Rachel took the time to find the right loan for her,
she was able to pay back the loan on time
and publish her new album. Yaay!
Borrowing money can help you accomplish your goals,
but only if you’re realistic about what you can afford.
When it comes time to find a loan,
discuss it with a financial professional and ask questions.
Learn about your payments and terms.
It’s up to you to make sure you know the rules
and get a loan that fits your needs.
I’m Lee LeFever and this has been Borrowing Money in Plain English
on the Common Craft Show.
One more thing,
The Common Craft Store now offers downloadable versions of our videos
for use in the workplace.
Find them at CommonCraft.com/store.

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