Types of Loans — slides
Financial Literacy Club
Credit & Debt · Lesson 5
Types of Loans
Installment vs. revolving: auto, student, personal, and home loans.
12-minute lesson · learnwithflc.org
Types of Loans · 1 / 21
Financial Literacy Club
Credit & Debt · Lesson 5
Types of Loans
Installment vs. revolving: auto, student, personal, and home loans.
12-minute lesson · learnwithflc.org
Today's goals
By the end of class, you'll be able to…
- Distinguish installment from revolving credit, and secured from unsecured loans
- Explain how a loan's term changes its monthly payment and total interest
- Compare loans by APR and total cost instead of monthly payment
Warm-up
Would you rather pay $300 a month for six years or $450 a month for four years for the same car? What else would you want to know?
Think, then write your answer.
The big idea
Types of Loans
Installment vs. revolving: auto, student, personal, and home loans.
Credit & Debt · Lesson 5
Credit cards are revolving credit. Most other loans are installment loans: you borrow a set amount, then repay it in equal payments over a set time.
Vocabulary
Principal and term
The principal is the amount you borrow. The term is how long you have to repay it — for example, 60 months.
Credit & Debt · Lesson 5
- Auto loans — for a car. The car secures the loan.
- Student loans — for education. Federal student loans have protections and repayment options that private loans usually don't.
- Personal loans — for almost anything. Usually unsecured, so rates depend heavily on your credit.
- Mortgages — for a home. The home secures the loan, and terms are often 15 or 30 years.
Vocabulary
Secured vs. unsecured
A secured loan is backed by something the lender can take if you stop paying — like repossessing a car. An unsecured loan isn't, so it usually costs more.
Credit & Debt · Lesson 5
The key tradeoff is term. A longer term makes each payment smaller but costs more interest in total. Compare loans by APR and total cost, not just the monthly payment.
Credit & Debt · Lesson 5
Think hard before co-signing
A co-signer is fully responsible for the loan if the borrower doesn't pay. It shows up on the co-signer's credit, and missed payments hurt both people.
See it
For a $20,000 loan at 7% APR, a 3-year term costs about $2,232 in interest, a 5-year term about $3,761, and a 7-year term about $5,356.
3 years ($618/month)
5 years ($396/month)
7 years ($302/month)
Real example
"What monthly payment works for you?"
At a car dealership, a salesperson asks Alex what monthly payment fits the budget. Alex says $300.
The dealer finds a way: a 7-year loan on a $20,000 car at 7% — about $302/month. It fits. But the total interest is about $5,356, compared with $2,232 on a 3-year loan.
A better approach: decide on a total price first, get pre-approved by a bank or credit union so you know your rate, and choose the shortest term you can comfortably afford.
Try it together
Try it: loan calculator
Change the term from 3 to 7 years and watch the monthly payment and total interest move in opposite directions.
Your numbers
Results
Monthly payment
$396.02
60 payments at 7% APR
Amount borrowed
$20,000
Total interest
$3,761
16% of what you pay
Total of payments
$23,761
- Principal (amount borrowed) $20,000
- Interest $3,761
Show year-by-year breakdownHide breakdown
| Year | Principal | Interest | Balance left |
|---|---|---|---|
| 1 | $3,462 | $1,290 | $16,538 |
| 2 | $3,712 | $1,040 | $12,826 |
| 3 | $3,981 | $772 | $8,845 |
| 4 | $4,268 | $484 | $4,577 |
| 5 | $4,577 | $175 | $0 |
Educational calculator, not financial advice. Results are hypothetical estimates based on the numbers you enter.
Activity · pairs · 10 min
Pick the Loan
- Scenario: a $20,000 car loan at 7% APR.
- Using the loan calculator, pairs record the monthly payment and total interest for 3-, 4-, 5-, and 6-year terms.
- Pairs choose a term for a buyer with a tight budget and one for a buyer with extra room, and justify each.
Check for understanding · 1 of 3
Two car loans have the same amount and the same APR. One lasts 3 years, the other 6.
Which costs more in total interest?
- AThe 3-year loan, because the payments are bigger
- BThe 6-year loan, even though each payment is smaller
- CThey cost the same
- DIt depends on the car's color
B. The 6-year loan, even though each payment is smaller
A longer term means you owe money for longer, so more interest builds up — even though each payment is smaller.
Check for understanding · 2 of 3
If you co-sign a friend's loan, you only have to pay if the lender can't find your friend.
- True
- False
False
A co-signer is fully responsible if the borrower doesn't pay, for any reason. Late payments also appear on the co-signer's credit.
Check for understanding · 3 of 3
If you stop making payments, the lender can take back the car.
What kind of loan is this?
- AA revolving loan
- BAn unsecured loan
- CA secured loan
- DA grant
C. A secured loan
The car is collateral that secures the loan. That's why auto loans usually cost less than unsecured personal loans.
Remember
Key takeaways
- Installment loans: fixed amount, fixed payments, set end date.
- Secured loans have collateral that can be taken if you don't pay.
- Longer term = smaller payment, more total interest.
- Shop by APR and total cost, not monthly payment.
- Co-signers are fully on the hook.
Discuss
Talk it over
- Why might someone choose a longer loan even though it costs more?
- Would you co-sign for a close friend? What would you want to know first?
Exit ticket
Why should you shop for a loan by APR and total cost instead of monthly payment?
Answer on your exit ticket before you leave.
Nice work today.
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learnwithflc.org/courses/credit-and-debt/loans
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