How Much Will That Loan Cost?

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MONEY MOMENTS 2018

How Much Will That Loan Cost?

Dr. Emily Schwartz, MidFirst Bank Financial Education Manager

Oklahoma PFL Standard 7: Borrowing Money

Borrowing money is a big responsibility. A loan is a legal agreement between a borrower and a lender to repay the amount borrowed. This lesson introduces students to credit reports, and how credit activities affect the cost of future loans.

Objectives

? Explain the importance of establishing a positive credit history ? Explain how the terms of a loan affect the cost of credit

Activity

1. Discussion Question: "Have you ever loaned someone money?" Lead a group discussion about the students' experience. Did they get their money back? If they loaned money to a friend who never paid them back, would they lend to that friend again?

2. Explain why lending institutions loan money to people, such as to buy a house, buy a car, or start a business. The institution's decision to approve a person for a loan is based on how likely they think that person is to pay it back. They decide this by looking at many factors, including the person's credit report.

3. Tell students that a credit report is a detailed record of a person's credit activity, including whether or not they've made their payments on time. Having bad credit means you may have mishandled loans in the past and as a result, future loans might be more expensive, or you may not be approved at all.

4. To demonstrate the importance of building good credit, put students in pairs to do a car loan activity. Have the students decide which one of them will pretend to have "good credit" and which one will pretend to have "bad credit." Explain they are both applying for a $20,000 car loan with a term of 48 months. The person with good credit receives a 3% interest rate on the loan. The person with bad credit receives a 10% interest rate on the loan. Using an online loan calculator like the one available on (bit.ly/MidFirstCarCalculator), have students calculate three things: 1. Each person's monthly payment 2. Each person's total car cost at the end of the loan 3. How much less the car would need to cost for the person with bad credit to have the same monthly payment as the person with good credit

Reflection Discuss how having bad credit can affect your budget.

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