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Course: Financial Literacy > Unit 5
Lesson 1: Borrowing moneySources of loans/credit
Sources of loans are places where you can borrow money, like banks, credit unions, or online lenders. People and businesses use loans for different needs, like buying a car, starting a business, or paying for school. Created by Sal Khan.
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Video transcript
- So let's talk a little bit
about credit and lending. So when I talk about credit,
I'm literally just talking about someone's willingness
to lend you money or to actually lend you money. You've heard of a credit card. When you buy something with a credit card, essentially the credit card
issuer is lending you the money to make that purchase, and you're gonna have to pay
that back at some future date, likely with interest, likely
with a lot of interest. Now, there's a lot of
different types of loans or credit you can get. And they're going to have different costs
associated with them. You're like, "Well, what's
the cost of a loan?" Well, sometimes, there's just an outright
fee associated with it, but more likely, or on top of that, the interest that you pay on
a loan is how much you pay. So if you're paying 2%
interest for a loan, you're paying a lot less
per dollar on that loan than if you had to pay,
say, 20% or 30% interest. And that might not seem like a lot, the difference between 2 and 20%. It's a ginormous difference. If you've watched our
videos on compound interest, if you're paying 20%
interest or even 10% interest and if you're not paying down
that balance pretty quickly, that could end up being
a lot, a lot of money. You could very easily end up
paying a lot more in interest than the initial amount of money
that you actually borrowed. Now, what are the scenarios? We're gonna pay less or
you're gonna pay more? Well, we have whole videos
on your credit score and the better your
credit score in general the better a risk you look
like you are to the lender. And so you're gonna have
to pay a lower rate, a lower interest rate,
which is a good thing. Now, above and beyond that, there's different types of loans. There's loans where if you
aren't able to pay it back, the person who lent you money, they're still gonna be
able to get something. So for example, if you take
out a mortgage to buy a house, that's a loan, and you
have a down payment. And if you aren't able to pay
it back for whatever reason, the bank will foreclose
and will take the house, and then they are likely to sell the house in order to get their money back. So there's some risk for the bank still. They have to go through all the trouble of
foreclosing on the house. Maybe property values go down. That's one of the reasons
why they also make you put a down payment, that also
protects them a little bit. But it's a lot lower
risk than if they didn't, if they weren't able to
get access to that house. And so there, you're gonna
have to pay lower interest. Similarly, a car higher risk than a house. So you're probably going to have to pay a higher
interest for a car loan, but if you don't pay, the bank will take the
car and then sell the car. At the other end of the spectrum, I talked a little bit
already about credit cards. You're just buying stuff
and if you don't pay back, it's going to be bad for you. The bank will really, they'll
report to the credit bureaus, and it's gonna hurt your credit score, and future people aren't
going to lend to you or they're gonna charge
a lot more to lend. But from the bank's point
of view, it's pretty risky. And so that's why they likely
charge much higher interest. And that interest can
easily be in the teens or even twenties, even up to
30% in certain situations. And that is a lot of interest. And that's why in other videos, we talk about maybe pay down
your credit card balances as quickly as possible. And then there's things,
even more extreme. Things like payday loans, which I don't recommend anyone
watching this video to use. Those are usually lenders to
some degree taking advantage of people pretty desperate for money where they're outta money, they need $500, they go to these payday lenders, and they say, "Okay we'll give you $500, but pay us $550 in three days
when you get your paycheck." For some folks that might
not feel like a lot, "Okay, it's an extra $50." But if you actually think about that as an annual interest rate,
I have a whole video on that, it's actually a ginormous interest rate. And if someone does that consistently, and it's obviously not
a great cycle to be in, you could end up paying a lot more to these payday loan
lenders than you suspect. So the big picture is credit
can be a useful thing. Maybe you're making an investment, you're buying real estate,
you need a place to live, you're buying a house, you need a car. These are all reasonable things and it is okay even sometimes
to potentially borrow for consuming things,
things that you enjoy. But I would be a little bit or
a lot more careful with that. But the key takeaway is
the bigger a risk you are, the more that you're likely
to pay for that loan.