Loan facts for kids

A loan is when you borrow money from someone, like a bank or a person, and you promise to pay it back later. It's like renting money for a while. You don't just pay back the amount you borrowed; you also pay a little extra for the service. This extra cost is called interest.

Banks and other financial groups often give out loans. Loans can also help increase the amount of money moving around in the economy.

What Makes Up a Loan?

When you take out a loan, there are a few important parts to understand.

Starting Payment (Deposit)

Sometimes, when you get a loan, you need to pay a part of the total amount upfront. This is called a deposit or down-payment. It's like a first payment to show you are serious about the loan. This first payment is usually bigger than your regular payments. Not all loans need a deposit, but many do. It's often a small percentage of the total money you are borrowing.

Regular Payments (Installments)

After the deposit, you'll make regular payments over time to pay back the loan. These payments are called installments. They might be paid every month, or at other set times, until the whole loan is paid off. The amount you pay each time depends on the loan's rules.

The Cost of Borrowing (Interest)

Interest is the extra money you pay on top of the amount you borrowed. It's like a fee for using someone else's money. The amount of interest you pay depends on the interest rate. This rate can be different for each loan and each lender. A higher interest rate means you pay more extra money.

Different Kinds of Loans

Loans can be grouped into two main types: secured and unsecured.

Secured and Unsecured Loans

Secured loans are loans where you promise something valuable, like a car or a house, to the lender. This valuable item is called security or collateral. If you can't pay back the loan, the lender can take your collateral. Because there's less risk for the lender, secured loans often let you borrow larger amounts and have lower interest rates. A mortgage (a loan to buy a house) is an example of a secured loan.

Unsecured loans are loans given without you having to promise any property as security. This means the lender takes a bigger risk. Because of this higher risk, unsecured loans are usually for smaller amounts and have higher interest rates. Lenders charge more interest to try and get their money back faster. Many personal loans are unsecured.

Personal Loans

A personal loan is usually a smaller loan that people use for everyday needs or unexpected costs. Since they are for smaller amounts, they are often easier to get approved for, similar to most unsecured loans.

Home Loans

Home loans are used specifically to buy a house. These are a type of secured loan, where the house you are buying acts as the collateral. If you don't pay back the loan, the lender could take the house.

Payday Loans

Payday loans are short-term loans that don't need any security. You can sometimes get one even if you don't have a good credit history. They are usually given based on whether you have a job and a steady income.

However, payday loans often have very high interest rates, especially if you don't pay them back on time. The high interest is the cost of getting money quickly and easily. Interest rates can be extremely high, so it's usually not a good idea to take a payday loan unless you are sure you can pay it back very quickly.

Auto Loans

Auto loans are loans given by banks or car dealerships to help you buy a car. Cars tend to lose value over time, so auto loans often have higher interest rates. The faster you pay off an auto loan, the less it will cost you in total.

Mortgage Loans

A mortgage is a special type of secured loan used only to buy a house. A mortgage company or bank will check if you can pay back the loan before giving it to you. Since it's a secured loan, the house itself acts as collateral. Mortgages can be short-term (like 15 years) or long-term (like 30 years), depending on how long you have to pay it back.

Credit Card Loans

When you use a credit card, you are actually taking out a loan. Credit card loans also come with interest and fees. Banks and credit card companies offer these loans. The interest rates on credit card loans are often higher than on most personal loans, sometimes around 15% or more.

Images for kids

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  Loan document from the Bank of Petrevene, Bulgaria, from 1936.

See also

In Spanish: Empréstito para niños