Learning About Loans

Source: Junior Achievement USA®

Interactive Video

[Two bank customers signing an official looking document inside of a brown portfolio. The banker is pointing to where to sign. There are two bundles of cash on the table.]

[Money seedling growing out of soil.]

Narrator: Have you ever heard of "seed money" for starting a business or funding an invention? 

[Cupped hands off to the side of a wheat crop holding a small amount of seeds. The small amount of seeds increases into a larger amount.]

The term dates back to ancient Mesopotamia, when merchant bankers would lend seeds to farmers as an investment for the upcoming crop. After harvest time, the farmers would return more seeds than they had borrowed—an early form of interest. 

[Icons representing items people provide as collateral on a secured loan: an heirloom, livestock, next season’s harvest, a car, a house.]

Modern-day personal lending started with secured loans, because lenders wanted to increase the chance they would be paid back. Borrowers put up property, houses, cars, livestock, family heirlooms, or even next season's harvest as collateral. 

[Person filling out a credit application form.]

After World War II, new forms of credit became more popular. Dramatic changes in technology have accelerated the growth of unsecured loans. Lenders have immediate access to personal financial data, credit scoring tools, and analysis software to make lending decisions. 

[Icons representing a car loan, a home loan, and medical bill debt move together inside of a circle.]

The top reason that people take loans is to consolidate their debt.

[Two bank customers signing an official document inside a brown portfolio. The banker is pointing to the signature line while one customer holds the pen. There are two bundles of cash on the table.]

Personal loans are one of the fastest-growing consumer debt products. But far more money is still borrowed on credit cards. 

[A man with a satisfied expression on his face, sorting a stack of $100 bills into piles on the table.]

Borrowing money can help pay for items you need now but can’t afford to pay for with cash. Loans are pretty common to [The text appears, “Use loans to:” An icon appears as each item is mentioned.]

• buy a car
• pay for education or training programs
• start a business
• buy a home, or
• combine existing debt to lower monthly payments

Of course, borrowing money isn’t free. [A loan document with a money bag appears.] When you borrow, you owe the lender something in return for the loan. [The Loan document is replaced with stacks of cash.] That cost is interest, which is the extra money you pay along with the loan amount over time. [The money moves into the bank.]

[A man pondering the two choices in his thought bubbles: a secured loan and an unsecured loan.]

If you are shopping for loans, keep in mind that there are different options, as with most financial products. You need to evaluate these options to find a fit for your personal situation. 

[A smiling couple holding coffee cups, looking at documents the loan professional is presenting to them.]

All loans share a few things in common: the amount you want to borrow, also known as the principal; the interest rate that determines how much extra you pay on top of the amount borrowed; and the loan term, which is the time you commit to pay the loan off. 

[On screen text: Select each loan type.]

There are two main types of loans: secured and unsecured. Select each loan type.

Card 1: Secured Loan

• extra level guarantee to lender
• valuables as collateral
• collateral loss if not repaid
• lower interest rates

Secured loans provide an extra level of guarantee to the lender, because you put something valuable, such as a house, car, boat, stocks, bonds, or collectibles, on the line as collateral to make the lender feel secure. If you can't pay back the loan, they may keep your collateral. Secured loans tend to have lower interest rates because of this safety net.

Card 2: Unsecured Loan

• no collateral required
• no lender guarantee
• higher interest rates
• regular payments for a set period

On the flip side, unsecured loans are like a friendly handshake—no collateral required. But because there's no guarantee, they usually come with higher interest rates. These loans are set up so you make regular payments for a set period.

[A man looking at receipts, holding a pen in his hand while typing on his calculator. There is a spiral notebook and a portfolio on the desk close by.]

Whenever you’re considering taking on any type of debt take your time to consider your options. Make sure you can comfortably fit the loan payments into your monthly budget.