When You Borrow
When you borrow money from a lender, like a bank, a credit union, a loan company, or, in the case of a student loan, from the federal government, you promise to repay the full amount the lender provides.
An arrangement like this, where you pay for something with borrowed money and repay at a later time, is called credit.
In most cases you also pay a fee, called interest, for the opportunity to use the money that is calculated as a percentage of the amount you borrow. That is why it is important to borrow ONLY what you need.
You can borrow money in two main ways:
- You can use a credit card to borrow for everyday expenses and for emergencies you haven't planned for. When you use your card, you get a bill for what you owe. Ideally, you should never charge more than you can afford to repay in full each time the bill arrives. If you don't repay in full, you'll owe interest on the remaining balance. Learn more about credit cards.
- You can take a loan to pay for a major expense, like college tuition, a car, or someday a home that you own. You repay in installments, on a regular schedule. Usually you're charged interest from the time you borrow, but with some federal education loans, called subsidized loans, no interest accrues until your first payment is due. When you pay off what you've borrowed, the loan ends. So does your obligation to the lender. Learn more about how loans work.