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Sometimes we don't have the money we need to accomplish a goal. Borrowing money

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can help, but if we aren't aware of how the system works, it can create bigger

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problems for us. This is borrowing money in plain English. Among friends, borrowing

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money seems easy. You just pay them back. However, we sometimes need to borrow a

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large amount of money from a financial institution, maybe for a home, a car, or

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education. Understanding how these relationships work is a key to being

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responsible with your money. Let's say you need to borrow $10,000 from a bank. As

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long as you meet their requirements, the bank is happy to loan you this money

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because when you pay it back, you'll have to pay a fee. This is how the bank makes

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money. It's called interest. When you borrow money, the interest you pay is

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usually a percentage of the total you borrowed. This percentage is called the

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interest rate. You'll see this rate referred to as the annual percentage

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rate, or APR, which is the interest and fees you'll pay over a year for

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borrowing money. Let's see how this works for Rachel. She's a musician who needs to

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borrow $10,000 to produce her new album. $10,000 plus interest is a lot of money

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to pay back, but she doesn't have to do it all at once. To make it more

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affordable, she pays it back in monthly payments. Each month, she's paying back

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part of the money she borrowed plus part of the interest. It adds up over time.

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This way, Rachel can see if she can afford to pay back the loan on a

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monthly basis. She found one loan that had a 5% APR with a one-year time frame.

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To pay it back, she would have had payments of $856 per month. It was too

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much. With what Rachel earns, she would run out of money in just six months. To

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avoid serious problems and owing even more money, she kept looking. Eventually,

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she found the right loan for her, a lower APR and a longer time frame. She found

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that spreading the payments across a longer time frame meant less to pay each

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month. Before signing on the dotted line, she was careful to understand all the

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terms of her loan. She learned that some interest rates could change during the

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loan, which could impact her monthly payments. Because she had a fixed budget,

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she made sure the interest rate for her loan wouldn't change. While Rachel was

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asking questions, she learned the rules as well, because breaking the rules can

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cause an affordable loan to become a big headache. For instance, if she pays late,

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she may owe the bank more money. She made a promise to herself to pay on time

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and avoid any late fees. It was wasteful. It was clear to Rachel that without care,

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problems could snowball. Changing APRs and late fees could have made her loan

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impossible to afford. Because Rachel took the time to find the right loan for her,

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she was able to pay back the loan on time and publish her new album. Yay!

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Borrowing money can help you accomplish your goals, but only if you're realistic

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about what you can afford. When it comes time to find a loan, discuss it with a

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financial professional and ask questions. Learn about your payments and terms. It's

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up to you to make sure you know the rules and get a loan that fits your

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needs. I'm Lela Fever, and this has been Borrowing Money in Plain English on the

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Common Craft show. One more thing. The Common Craft store now offers

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downloadable versions of our videos for use in the workplace. Find them at

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commoncraft.com slash store.