Personal Finance / Unit 5: Credit and Debt
5.5 Loans
Notes
A loan is borrowed money repaid over a set term with interest. Common loans include auto loans, student loans and personal loans.
- Principal is the amount borrowed. Interest rate is the cost. Term is the repayment period.
- Total repaid = monthly payment $\times$ number of payments.
- Example: $6,000 at 5% simple interest for 2 years has interest $6000 \times 0.05 \times 2 = 600$. Total $6,600; over 24 months that is $275 per month.
- A longer term lowers the monthly payment but raises total interest.
- A fixed rate stays the same; a variable rate can change.
Practice
A loan has payments of $200 per month for 24 months. How much will be repaid in total?
$200 \times 24 = 4800$.
Which change usually makes a loan cost more in total?
More months means more time for interest to accumulate.
You borrow $5,000 at 4% simple interest for 3 years. How much interest do you pay?
$5000 \times 0.04 \times 3 = 600$.
Ready for more? Take the Unit 5 test.