TEACHER GUIDE 7.

1 BORROWING MONEY PAGE 1

Standard 7: The student will identify the procedures and analyze the responsibilities
of borrowing money.

Remember the Interest

Priority Academic Student Skills
Personal Financial Literacy
Objective 7.1: Identify and analyze sources of credit (e.g., financial “Mom, it is not fair. If
institutions, private lenders, and retail businesses) and credit Bill can have a new
products (e.g., student loans, credit cards, and car loans).  truck, why will you not
Objective 7.2: Identify standard loan practices, predatory lending let me have one too?
practices (e.g., rapid tax return, rapid access loans, and payday His parents love him
loans), and legal debt collection practices.  more than the both of
Objective 7.3: Explain the importance of establishing a positive you love me. Otherwise,
credit history (e.g., maintaining a reasonable debt to income ratio), you would buy me a new
describe information contained in a credit report, and explain the car. I hate driving Dad’s
factors that affect a credit score (e.g., the relationship between old car. It IS NOT fair. I
interest rates and credit scores). want a truck. All my
Objective 7.4: Explain how the terms of a loan (e.g., interest rates, friends have new trucks,
fees, and repayment schedules) affect the cost of credit. and I want one too.”

“Alright, Rik. If you want

a new truck, go pick out
one, and we will see
how much it really costs
to buy that new truck.”

Rik went online to

customize the one he
wanted. It was only
$28,800 suggested
price, with a $2,000
rebate.

In 72 months, he
Lesson Objectives figured he could pay it
off at $375 a month
($26,800/ 72=$347). If
Explain why people borrow money. you add a little for
Identify the rights and responsibilities of borrowing interest, it would be
money. about $375.
Demonstrate appropriate situations to borrow money.
Evaluate the impact of borrowing money. Is Rik right?

© 2008. Oklahoma State Department of Education. All rights reserved.

 Teacher Guide 7.1 2

Personal Financial Literacy Vocabulary

Credit: An agreement to provide goods, services, or money in exchange for future
payments with interest by a specific date or according to a specific schedule; the use
of someone else’s money for a fee.

Collateral: Something of value (often a house or a car) pledged by a borrower as

security for a loan. If the borrower fails to make payments on the loan, the collateral
may be sold; proceeds from the sale may then be used to pay down the unpaid debt.

Comparison shopping: The process of seeking information about products and

services to find the best quality or utility at the best price.

Interest: Payment for the use of someone else’s money; usually expressed as an
annual rate in terms of a percent of the principal (i.e., the amount owed).

Installment credit: A loan repaid with a fixed number of equal payments.

Interest rate: The percentage rate of interest charged to the borrower or paid to a
lender, saver, or investor.

Loan agreement: A type of contract between the borrower and the lender explaining
the requirements of fulfilling the loan.

Mortgage: A long-term loan to buy real estate including land and the structures on it.

Secured credit: Credit with collateral (i.e., a house or a car) for the lender.

Noninstallment credit: Single-payment loans and loans that permit the borrower to
make irregular payments and to borrow additional funds without submitting a new
credit application; also known as revolving or open-end credit.

Unsecured credit: Credit without collateral, such as credit cards.

© 2008. Oklahoma State Department of Education. All rights reserved.

 Teacher Guide 7.1 3

Introduction
People borrow money for many reasons: to buy a car or a house;
to remodel their home; to pay for college expenses; to open a
business; and, in some cases, to pay their bills. Borrowing
money allows us to get what we want today or to pay for things
when we do not have enough cash. While that sounds great, we
must remember that borrowed money must be paid back.
Making poor decisions about loans can affect our finances for a
long time.

Borrowing money does not mean that we have more money.

In fact, it is the opposite. Borrowing money means we are ● ● ●
using tomorrow’s income to buy things today. If we are not U.S. Debt
careful, we will borrow too much — leaving us with a big Consumers in the
stack of bills and no money to pay them! United States have
$950 billion in credit
Lesson card debt as of March
2008, and $1.6 trillion

A
ll choices have costs, and that is certainly true when
borrowing money. In most cases, borrowing money
in auto loans and
involves getting a loan; in return, you promise to repay other nonrevolving
that loan. The amount you repay, however, is not just the debt.
amount you borrowed. It also includes interest. Depending ● ● ●
upon the rate of interest and the amount of the monthly
payment, it could increase the price of your purchase by
double, triple, or even more.

Interest is payment for using someone else’s money

PRESENTATION
and is stated as a percentage. The percentage charged
is the interest rate. Interest and other fees increase
The multimedia slide your cost of borrowing, but they also make it possible
presentation for this for lenders to stay in business.
lesson outlines the
content in this section. People who lend money expect more in return. For
them, lending money needs an incentive, and that
You may want to use it incentive is getting back more than they lent to you.
with your students, or The additional amount is generally called interest.
print off the slides to
use as lecture notes.

© 2008. Oklahoma State Department of Education. All rights reserved.

 Teacher Guide 7.1 4

Why People Borrow Money

People borrow money for many reasons; some reasons are

better than others. How do you decide what is a good ● ● ●
reason and what is not so good? The answer is this: It Borrowing
depends. To make a good decision about when to borrow, Rule No. 1:
you need more information.
Do not sign any loan
Today, people make hundreds of loans every day from a agreement unless you
variety of lenders, including banks, credit unions, insurance
read it carefully and
companies, mortgage companies, and other financial
service providers. People also borrow thousands of dollars understand everything
daily using their credit cards. Every time you use a credit in the agreement.
card, it is a short-term loan from the company providing ● ● ●
the card. Like other loans, it must be repaid with interest.

If you have to pay interest and fees that increase your costs, why do you borrow? The
answer is relatively simple: You borrow because you want or need a way to make
purchases. For many people, borrowing is the only way they are able to purchase
items such as cars and houses.

Following are a few examples:

 A mortgage allows you to buy a home.

 A refinance loan lets you replace the original mortgage with a loan at a lower
interest rate.
 A personal loan gives you cash for an emergency, to make special purchases, to
fund a vacation, to make home repairs and for other purposes.
 A student loan provides money to pay for a college education.
 A home equity loan is money borrowed against the equity you own in your
home and can be used for anything.
 An auto loan can help you buy a car.

© 2008. Oklahoma State Department of Education. All rights reserved.

 Teacher Guide 7.1 5

In the box below, rank the above reasons that people borrow money — starting with
the best reason and ending with the worst reason.

1.

2.

3.

4.

5.

6.

Does your ranking look something like this?

 Home loan: A house tends to increase in value and will be worth more when
we want to sell it.
 Student loan: Investing in ourselves or our children with a college education
increases potential earnings.
 Refinance loan: Refinancing our mortgage reduces our payments and saves
money in the long-run.
 Auto loan: Even though most of us get a loan to pay for a car,
we would be much better off to save up the money and pay cash
— avoiding the extra interest paid on something that declines in
value.
 Home equity loan: Borrowing against your home is high risk, unless
you are remodeling or making major repairs. What if you borrow
money on your home to pay for a wedding, take a big vacation, buy
new furniture or spend it on other purposes — then cannot make
the payments? You may actually lose your home and have no place
to live.
 Personal loan: Saving money for emergencies, vacations, and other purchases
is a much better option. Personal loans tend to have high interest rates, which
greatly increases the cost of your purchase.

As a general rule, you should borrow money when you are investing in the future —
not just to buy something you want now. Borrowing to make minor purchases is a sure
way to overspend or generate more debt than you can manage.

© 2008. Oklahoma State Department of Education. All rights reserved.

 Teacher Guide 7.1 6

Rights and Responsibilities of Borrowing Money

Each loan has some kind of loan agreement, a special type of contract requiring both
the borrower and the lender to do exactly what is stated in the document. Whether it
is a credit card, a mortgage, an auto loan, or any other kind of loan, the loan
agreement specifies the rights and responsibilities of both parties. Before deciding to
borrow money, the wise borrower will comparison shop to evaluate the different
terms of the loan as specified in the loan agreement.

Some of the basic components of a loan agreement include:

 Amount — the exact amount you are borrowing;
 Interest rate — the rate of interest you will be charged;
 Payment — the exact amount you are required to pay back to the lender and
how frequently that payment should be made (weekly, monthly, annually,
etc.);
 Prepayment — a special clause that allows you to make additional payments
and pay off the loan faster;
 Late fees — the additional amount owed if you are late with a payment; and,
 Default — what happens if you fail to make the payments.

Depending upon the type of loan, it will include other “terms” or “conditions.”

Different kinds of credit

While there are many different types of credit accounts, there are only four types of
credit: secured credit, unsecured credit, installment credit, and noninstallment
credit. Secured credit is backed by collateral. In other words, you pledge something
of value to the lender who can seize and sell it if you fail to repay the loan. Some
items that might be used as collateral include cars, real estate, jewelry, investments,
and other assets that are acceptable to the lender. Because you have pledged
something as collateral, the lender has less risk in getting something in return for the
loan. As a result, secured credit is often the easiest credit to obtain. A home
mortgage and a car loan are common examples of secured credit.

Unsecured credit means the lender loans you money based on your willingness and
your ability to repay the money. Because you pledge no collateral, the creditor is
taking a greater risk of losing the money if you do fail to repay it. The lender must
have more confidence in you as a person and your credit history before lending you
money. Unsecured loans are based primarily on how you have managed money in the
past and in your current financial situation. If you fail to repay the loan, the lender
can sue and take you to court. You would be required to pay the money if the court
finds you guilty and orders you to either pay or requires you to turn over some asset
to offset any money the lender does not receive.
© 2008. Oklahoma State Department of Education. All rights reserved.
 Teacher Guide 7.1 7

Installment credit can be either secured (requiring collateral) or unsecured (no

collateral). Installment credit requires you to make periodic, regular payments for a
certain period of time to repay the full amount of your loan plus interest. Sometimes
installment credit is called “open ended” or “revolving” credit, where each payment
reduces the amount owed and allows you to borrow more. Common examples include
auto, personal, and education loans.

Noninstallment credit can also be secured or unsecured. This type of credit requires
you to pay back the entire amount by a specific date. For example, your cell phone
bill says “payable in full upon receipt.” That means, you owe the entire amount at
one time. Bills from the cable company or your doctor are types of noninstallment
credit accounts that require “lump sum” payments.

Financial Impact

Making one or two payments monthly will probably not cause too many problems for
your budget. However, when you continue borrowing from many different sources,
the amount of debt can rise very quickly. It sounds good when the local Buy Me Now
store advertises a new DVD player for only $10 a month. But that $10 on top of other
monthly payments may be more than you can handle.

If you have too much debt, then it becomes very difficult to make your monthly
payments. Missing payments or making late payments has a negative effect on your
ability to get additional credit when you really need it. Also, you will probably end up
paying even higher interest rates and more late fees than people with good credit.

COMPLETE: Borrow, Do Not Borrow – Activity 7.1.1

Review student answers before continuing with this lesson.

List three things you learned from this activity:

1.

2.

3.

© 2008. Oklahoma State Department of Education. All rights reserved.

 Teacher Guide 7.1 8

Conclusion
Learning when to borrow and when NOT to borrow will
improve your financial future. If you buy everything on credit,
you are reducing the amount of money you will have available If you disagreed with Rik’s
for future purchases. Before borrowing, stop and think about computations, you are
how many hours you will need to work and how many years it right!
will take to pay off the loan.
When Rik talked to the
Borrowing money is based on a contractual agreement. Failing new truck manager, he
to make payments or defaulting on a loan will have a long- could not believe the
term negative impact on your ability to get credit for many payments would be $100
years. Even buying things on sale is more expensive when you more than he calculated.
borrow to buy them. Depending upon the terms of the loan
agreement, you may end up paying more for the sale item How can that be right?
than when making the purchase for cash at the full price. $475 x 72 is over
$34,000.

Even though the truck

price was $26,800, Rik
had to include interest on
his loan payment.

If he lowered his
payments to $375 a
month, he would need to
make payments for 8
years and the total cost of
the truck would be more
than $37,000.

Rik decided that driving

Dad’s old car was not so
bad after all. At least for
awhile.

© 2008. Oklahoma State Department of Education. All rights reserved.

 Teacher Guide 7.1 9

Name: ___________________________ Class Period: __________________________

Remember the Interest

Review Lesson 7.1
Answer the following questions and give the completed lesson to your teacher to review.

1. Differentiate between secure and unsecured credit.

2. Discuss some of the reasons that people borrow money.

3. What is a loan agreement, and why is it important?

© 2008. Oklahoma State Department of Education. All rights reserved.

 Teacher Guide 7.1 10

Name: ___________________________ Class Period: __________________________

Borrow, Do Not Borrow – Activity 7.1.1

Read the following statements and decide whether you should borrow or not borrow
to complete the transaction.

1. With the move to high-definition television, you decide to buy a new flat screen
HDTV for your room.

Borrow Do Not Borrow

Why? ______________________________________________________________

2. You have taken a summer job and need reliable transportation, so you decide to
buy a used car.

Borrow Do Not Borrow

Why? ______________________________________________________________

3. You are at the mall with friends and see a new pair of boots, but you do not have
enough cash to buy them.

Borrow Do Not Borrow

Why? ______________________________________________________________

4. You friend Harold just bought a new skateboard, so you want a new one too.

Borrow Do Not Borrow

Why? ______________________________________________________________

5. You have just graduated from college and have a new job. You have enough money
for a down payment on a house, but need a loan to buy a house.

Borrow Do Not Borrow

Why? _______________________________________________________________

© 2008. Oklahoma State Department of Education. All rights reserved.

 Teacher Guide 7.1 11

6. You have maxed out your credit card, so you are considering getting a loan to
make your payments.

Borrow Do Not Borrow

Why? ______________________________________________________________

7. Your friends are going on a special trip to celebrate graduation, but you do not
have the money to go.

Borrow Do Not Borrow

Why? ______________________________________________________________

8. You receive a scholarship to go to your favorite college, but it is not enough money
to pay all of your expenses.

Borrow Do Not Borrow

Why? ______________________________________________________________

© 2008. Oklahoma State Department of Education. All rights reserved.