You may have borrowed money from a friend for an after-school snack or from your parents to see a baseball game, but in the future you might need to borrow more than a few bucks. The cost of going to college or buying a car is usually more than you have saved in your bank account. Luckily, investing in your future or purchasing an expensive item is still possible with a loan. When you borrow money from a bank, it’s not free money — you have to pay it back, plus interest. This means you have to pay back all the money you borrowed plus extra for the service.
Have you watched car commercials where they’re talking about car financing deals? In a few years, you might be driving. You may not be able to buy a car today, but for this exercise, let’s look at how a car loan works. A typical length of a car loan is five years at about a 4% interest rate. If you are under 18 and want to take out a car loan, you will need your parent or guardian to be a cosigner.
|Total amount borrowed||$5,000|
|Length of loan||60 months|
|Total cost of loan plus interest||$5,524.96|
The amount of debt you’re in may impact how easily you can qualify for future loans after you turn 18. There is a written record, or credit history, that tracks how you’ve repaid previous loans, any outstanding debt and other financial history. Your credit history determines your credit score, which helps lenders decide the credit risk associated with loaning you money. Credit scores range from 300 to 850. Generally, the lower your credit score, the higher the interest rate you will have to pay on future loans because it’s assumed there’s a higher risk you might not pay it back on time.