A Loan Is Free Money, Right?

CASH KID

Nov 20 2023 • 8 mins

A loan is free money, right? This week we dive into learning three more financial terms we "Cash Kids" need to learn to further our super financial skills. Loan, debt, and interest. How are they all tied together? How much debt are Americans in? Plus, a Cash Kid blooper to laugh about. That and more coming up in this episode of the Cash Kid Podcast. Learn more about your ad choices. Visit megaphone.fm/adchoices

Transcript

That’s Warren Buffett during a conference in 2009, stating there’s even a problem with this generation when it comes to financial literacy terms. It’s my goal, that’s not said about my generation!

So, welcome back Cash Kid Podcast listeners! You’re listening to episode 6 already of season 2 where we are focused on building super financial literacy skills this season.

What about debt and interest rates?

And how much debt are Americans in?

You’ll find out.

Stay tuned. The Cash Kid Podcast is underway.

Intro tease:

So you’ve got some cash. Maybe from an allowance, or that money your grandma gave you for your 7th birthday. Here you go, sweetie. Thanks, Grandma.

Whatever it is, what are you going to do with it? Spend it, hide it away… or maybe invest it? Let’s start learning how to make that money grow.

Time to learn how to be a cash kid.

Listen, let’s be honest. When kids ask their parents for money and they give it to us…. In the back of our minds, we have no intentions of paying that money back, right? I mean. We used it. And for the majority of our lives up until we start making our own money, this is how it works.

But in the real world, when someone loans you money… they definitely, definitely, expect you to pay them back. This brings us to our first term this episode. What is a loan? (ding)

A loan is basically an amount of money that a bank or lender has allowed you to borrow for a certain amount of time and pay back with interest.

One example is a mortgage. This is the type of loan your parents probably have to pay for your house. Most mortgages are set at a 30 year loan. So say you purchase a house and take out a loan (mortgage) and have 30 years to pay a certain amount each month to pay back the bank that loaned you the money to buy the house.

When you take out a loan, you incur what our next financial term is called… debt.

Debt is money that you owe to either a person or a business.

Here are some stats.

American households carry a total of $17.1 trillion in debt as of the second quarter of 2023, and the average household debt is $101,915 as of the end of 2022.

Rising debt can mean less economic opportunities, plus slows economic growth.

Now, in the mortgage example, your parents owe the bank a certain amount every month for the next 30 years.

So let’s say you also need a car. So, you take out an auto loan. Auto loans are usually set around 5 years. It’s the same principle. You now have a new loan and more debt basically. You have more money you owe back to a financial institution over a period of time.

Last episode, we talked about your credit score and what things can affect your credit score. The amount of loans you have open and the amount of debt you have, can impact your credit score.

Now, if you make your loan payments each month on time, then you are being financially smart and paying down your debt. But if you don’t, you can incur additional fees and your interest rates could go up, thus increasing your debt.

I think it’s clear which direction you want to be headed in, right? So, is a loan free money? Nope. Those days of just taking your parents cash and never giving it back were fun, but the real world is knocking… and they want that cash back.

(music)

Now, how does someone get a loan? Well, you  have to show you have good credit which we discussed in previous episodes. You have to show you are responsible financially so the banks will in good faith trust you to pay the money back.

How many of you have had a friend or sibling borrow some money, and in the back of your mind… you knew… that money is gone?

Lenders will look at your past financial history, your credit record and see if you are eligible to be offered a loan based on your habits and behaviors financially. They won’t think of you as a friend though and just let it go… this is business, they want to feel confident you can repay. Which means they’ll also want to know how much money you make. They want to see that you don’t have five credit cards, two car loans, a mortgage, and now need another loan but don’t make enough to even pay off those other, there’s that word again, debts.

So, be aware. Taking out a loan needs to have a purpose in mind… and a game plan to pay it back to eliminate your debt.

And let’s just touch on interest here for a minute. With any loan, not only is it not free money, it’s money borrowed with a fee attached. See, when you borrow money, you are charged a specific interest rate (like a fee) for the bank allowing you to borrow that money in the first place. So let’s say you have a $1,000 dollar loan and you have ten months to pay it back. The loan agreement states you must pay a balance of $100 each month plus 5% interest. That means you’ll pay $102.31 cents each month. By the time you pay it off, you will have paid the $1,000 back….plus…. an extra $23.06 in interest. I could calculate bigger numbers… but they scare even me!

So, loan, debt, and interest. They’re all tied together you see. Our goal here with the Cash Kid Podcast is to be aware of these terms early in life so we can make smart informed financial decisions to keep us out of bad debt, and paying more in the long run.

Cash Kids, we have more terms, discussions, and skills to learn. Thank you for tuning in to this episode. If you have a question, please, reach out to me at cashkidspodcast@gmail.com and I’ll answer it in a future episode. You can also reach out via our website at cashkidpodcast.com.

Follow us on Instagram and wherever you are listening, leave a review! We need your help reaching a larger audience and building the financial skills of the next generation.

Cash Kid, out!

Disclaimer:

The information presented represents the views and opinions of the guests. This show does not intend to provide personal investment advice through this podcast. This content has been made for informational and educational purposes only. To make a full and informed investment decision, we advise you to speak with a financial advisor and for kids, definitely your parents first before investing.