Podcast
Questions and Answers
You can earn ______ on the money you save in your bank account.
You can earn ______ on the money you save in your bank account.
interest
A ______ allows you to access your funds when needed.
A ______ allows you to access your funds when needed.
bank account
When you add money to your account, it is called a ______.
When you add money to your account, it is called a ______.
deposit
Your ______ decisions can affect your overall financial health.
Your ______ decisions can affect your overall financial health.
When you take money out of your account, it is called a ______.
When you take money out of your account, it is called a ______.
What is a loan?
What is a loan?
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Study Notes
Banking Vocabulary
- Bank Account: A record of the money you have deposited in a bank
- Deposit: To put money into a bank account
- Interest: Money earned on your savings, usually a percentage of the amount you deposited
- Saving: Setting money aside for future use
- Spending: Using money to buy goods or services
- Withdrawal: Taking money out of your bank account
Secured Loans
- Require the borrower to provide collateral, such as property or assets
- Lower interest rates due to reduced risk for lenders
- Common examples include mortgages and auto loans
Unsecured Loans
- Do not require collateral
- Higher interest rates due to higher risk for lenders
- Examples include personal loans and credit cards
Fixed-Rate Loans
- Interest rate remains constant throughout the loan term
- Predictable monthly payments
- Common in mortgages and some auto loans
Variable-Rate Loans
- Interest rate may change based on market conditions
- Monthly payments can fluctuate
- Often linked to an index, common in home equity lines of credit
Conventional Loans
- Not insured or guaranteed by the government
- Typically offered by banks and credit unions
- Requires good credit and substantial down payment
Government-Backed Loans
- Insured or guaranteed by government entities
- Examples include FHA loans, VA loans, and USDA loans
- Typically have lower credit requirements and smaller down payments
Student Loans
- Designed to help students pay for post-secondary education expenses
- Can be federal or private
- Federal loans often have lower interest rates and flexible repayment options
Payday Loans
- Short-term, high-interest loans intended for emergency expenses
- Typically due on the borrower’s next payday
- High risk of debt cycle due to exorbitant fees
Installment Loans
- Borrow a fixed amount, repaid over set terms with regular payments
- Common categories include personal loans, auto loans, and mortgages
Line of Credit
- Flexible loan allowing borrowing up to a set limit
- Interest is paid only on what is drawn
- Commonly used for home equity and business financing
Bridge Loans
- Short-term loans used until permanent financing is secured
- Helps bridge the gap for significant purchases, such as real estate
- Typically higher interest rates due to short-term nature
Commercial Loans
- Loans taken out to fund business operations or expansion
- Can be secured or unsecured and may include equipment financing
- Terms can vary significantly based on lender and business profile
Types of Loans
- Secured Loans are backed by collateral, meaning the lender can seize the collateral if the borrower defaults on the loan. This reduced risk often results in lower interest rates.
- Unsecured Loans do not require collateral, making them riskier for lenders and thus resulting in higher interest rates.
- Personal Loans are unsecured loans used for various purposes, such as emergencies, debt consolidation, or large purchases.
- Mortgages are secured loans specifically used to finance the purchase of real estate. They typically have long repayment terms, usually 15 to 30 years.
- Auto Loans are secured loans used for purchasing vehicles and typically have shorter repayment terms than mortgages.
- Student Loans are designed to cover education expenses and can be either federal or private, each with different repayment plans.
- Business Loans are used to finance various aspects of business operations and can be secured or unsecured, depending on the specific needs of the business.
Loan Components
- The Principal is the original amount of money borrowed.
- The Interest Rate is the percentage charged on the principal and can be either fixed or variable.
- The Term is the length of time over which the loan must be repaid.
- The Monthly Payment is the amount paid each month to cover both principal and interest.
- Fees are additional charges associated with the loan, such as origination fees, late fees, etc.
Loan Process
- The Application stage involves the borrower submitting a loan request with personal and financial information.
- Approval requires the lender to assess the borrower's creditworthiness and decide whether to approve the loan.
- The Disbursement stage involves the release of the approved funds to the borrower.
- Finally, the Repayment stage requires the borrower to make scheduled payments until the loan is fully paid off.
Considerations When Taking a Loan
- Interest Rates vary significantly between lenders so it’s important to compare rates from different sources before deciding.
- Credit Score plays a crucial role in loan terms, with higher scores generally leading to better rates and conditions.
- Repayment Terms should be carefully understood to ensure the borrower can manage the monthly obligations comfortably.
- Total Cost is the total repayment amount including all interest and fees, which should be calculated beforehand to avoid unexpected expenses.
Consequences of Defaulting on a Loan
- For secured loans, defaulting can result in the lender seizing the collateral.
- A default can negatively impact the borrower's credit score, making it harder to obtain loans in the future.
- Lenders may pursue legal action against borrowers who default on their loans.
Key Terms
- Amortization refers to the gradual repayment of a loan over time through regular payments.
- Refinancing involves obtaining a new loan to pay off an existing one, often to secure better terms.
- Loan-to-Value Ratio (LTV) is a financial term used by lenders to express the ratio of a loan to the value of the purchased asset.
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