Financial Literacy: Loans and Debt

Loans – Terms, Interest, Years, Minimum Payment (Inc Credit Cards)

When we first talked about personal debt in the US, we used reports for March 2022. At that time, total personal debt was at an all-time high of $14.96 trillion. It’s hard to think in numbers that high. What it means was that the average adult American owed approximately $59,000. That’s huge. Until you think about the new numbers.

Since then, consumer debt increased to $16.5 trillion, with the average American debt at $96,371.
So why is that happening? Why is personal debt increasing so quickly? One of the main reasons is inflation. Everything is going up in price – food, clothing, gas, cars, houses, energy. When people need more money to buy things that have become more expensive, they often borrow money to make those purchases – resulting in more debt.

In order to understand debt better, we need to know what a loan is, what it can do for us, and what are responsibilities are when we borrow money.
Here is a very basic example

  • I need money for some purpose (to buy something like a car, or to pay for college tuition or for an unexpected expense like medical bills, or to start my own business.
  • I go to someone who is willing to lend me the money I need
  • We agree on the terms of the loan
    • how much I’m going to borrow
    • what interest rate I have to pay for the privilege of borrowing the money
    • how long I have to pay the money back, and
    • how I’m going to pay it back.

Below are two very short videos on (1) the types of loan and (2) the terms of a loan.

Loan Basics: Understanding the different kinds of loans
Loan Basics: Principal, Interest, Term

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