Have you ever checked out a book at the library or asked your bestie if you can wear their hoodie? This is borrowing. But did you know that you can also borrow money?
Borrowing money is often something that we don’t learn about in school, but it’s an important financial skill. In this article, we’ll teach you all you need to know about borrowing money so you can learn how and when to do so responsibly.
What is Borrowing?
Let’s start by learning the basics: Borrowing is taking something now with the promise to return it later.
Say you want to start a lemonade stand but don’t have the cash to get supplies. You could ask your parents for a loan and pay them back after you’ve sold a few cups of lemonade.
Of course, once you get older, you might not have lemonade stands anymore and will need larger sums of money. In that case, you might wanna ask the bank for a loan. When this happens, the bank will set terms; they’ll charge you interest on the loan and decide when your payments are due.
Different Types of Borrowing
Borrowing comes in many shapes and sizes, depending on what you need the money for. These are some of the most common types of loans you might take out as you grow up.
So, you’ve definitely seen your parents swipe their credit cards at places like the grocery store or the mall. But did you ever wonder where that money comes from? Every time you use a credit card, it’s actually money that you borrow from the bank and that you’ll have to pay back with interest. The longer you take to pay, the more expensive the loan becomes.
Need some extra cash to buy a car? That’s when auto loans can come in handy. Since cars are pretty expensive, most people need to borrow money to buy one. When getting a loan to buy a car, you agree to slowly pay a lender back in a specific period of time. This can include any interest rates set by the lender.
Buying a home is one of the biggest purchases you’ll ever make. Houses aren’t cheap, and you will most likely need to take out a loan to buy one. Home loans are also known as mortgages. They can make the house of your dreams affordable and help you grow your personal wealth.
Going to college will be a huge stepping stone in your life. Being accepted in and of itself is a huge accomplishment. But what if the tuition for the school of your dreams is just too expensive? Although student loans are not free and can take years to pay off, they can also make college affordable and help you get ahead in life.
Is Borrowing Good or Bad?
TBH, there’s no clear-cut answer to this question. Borrowing can be both a good and bad thing. It depends on the situation, what you’re spending the money on, and how well you pay off your debt.
To give you a better idea, here’s a good old pros and cons list:
The Pros of Borrowing
Borrowing money can be a tool that makes life easier. Some of the advantages of loans include the following:
- It helps you afford expensive things without spending all your cash at once
- It breaks down payments into smaller amounts that are easier to manage
- If you pay your loans on time, next time you need to borrow money the interest rate could be lower
- It’s possible to borrow a little or a lot of money, depending on the situation
The Cons of Borrowing
Now, it’s important to know that borrowing also comes with its own set of risks. For example:
- If you borrow too much, you may not be able to keep up with your payments
- If you miss several payments, your personal property could be taken away
- Not paying on time will result in expensive fees and penalties
- Bad payment habits show up on your credit report and make it hard for you to take out future loans
How Your Parents Can Help You Learn About Borrowing
Have a business idea and need some funding? Or do you need an advance on your allowance to get the newest video game? If you don’t have the cash available, consider asking your parents for a loan. Borrowing money from your folks is a great way to learn about loans IRL.
Although there’s less pressure, you’ve gotta take this seriously so that your parents know you’re responsible. Plus, it’s a good way to develop healthy money habits. Once you’ve shown your trustworthiness, they’ll be more likely to loan you money in the future – and that’s actually how real loans work! The better you are at paying loans back, the better terms and interest that you get on your next one.
Don’t let the finance lingo freak you out. Here are a few vocab words to make borrowing a little less complicated:
- Lender: Person or institution that lets you borrow money.
- Borrower: That’s you! The person borrowing money and paying back for the loan.
- Interest: The extra money that you pay when you take out a loan.
- Principal: The amount that you borrow before interest.
Resources & Books to Learn More About Borrowing
Okay, we’ve covered the basics. But there’s more to learn when it comes to borrowing money, and there are lots of great books out there to help you learn more! Here are some of our faves. Check out our Kids’ Money book library for more great reads!
The Little Borrowing Brother
If you’re in elementary school, check out The Little Borrowing Brother. This is the story of a younger brother who borrows money from his older sister. But when it’s time to pay her back, things get messy. How will he manage to pay her back? You’ll have to read to find out.
How to Turn $100 into $1,000,000: Earn! Save! Invest!
Every rich person has to start somewhere and sometimes, this means they need to borrow money to kickstart a business. In How to Turn $100 into $1,000,000: Earn! Save! Invest!, you’ll learn exactly how that process works in just three simple steps. Perfect for middle schoolers with a money-making mentality.
I Want More Pizza
If the title’s not enough to make you wanna read this page-turner, you’ll have to take our word for it. I Want More Pizza is a delicious resource for entrepreneurial kids who want to start their own business but need some money to get it off the ground. It uses a fun pizza model to teach lifelong money management skills, including how to responsibly take out a credit card and loan.
You’ve Got the Basics Down
Congrats on getting a head start on your financial education! Borrowing money is an essential skill that can help you buy expensive items, teach you to manage your money, and learn how to pay it back. With this new information, you’ll be well on your way to being a financial expert. Keep up the great work, and in no time, you’ll be a responsible and knowledgeable money-making machine!