Are you hoping to buy a car some day? You probably have an idea of what the perfect car would be, but do you have an idea of what the perfect loan would be if you needed to borrow money for the car?
When you take out a loan from a bank, you will receive the money as a lump sum but then must pay it back with interest. You have seen and heard the word "interest" a lot throughout your financial learning experience. When it comes to loans, interest is what lenders charge you for borrowing their money. When it comes to deposits, interest is what banks pay you for depositing your money in a savings account. The interesting thing about interest is that there are multiple types—for instance:
Ida is looking to take out a loan to helpa pay for a new car. She knows the major factors that affect a loan payment and total amount paid are: the amount borrowed, the interest rate, and the time of the loan. She is comparing two different loan options. Both options will let her borrow the $20,000 she is looking for, which she will pay back in two years; however, the interest listed on each of the contracts is different.
Loan 1
Simple Interest at 4%
Loan 2
Compound Interest at 4%
What is the difference? Will Ida end up paying more in interest with simple interest or compound interest? Does it matter? These questions and more will be answered throughout this lesson.
Question
Now that Ida has noticed the interest on each of the loans is different, what should she do next?
Whenever Ida is faced with a situation, she knows nothing about, she researches! Her next step in this situation is to research simple and compound interest to fully understand each of her loan options.
