Every year around this time, young adults nationwide toss their caps toward the sky celebrating their graduation.
What many of these teen revelers don’t know is how much they don’t know, especially when it comes to taking out loans to pay for college, cars and – further down the line – their first homes.
While most high school grads have probably read “The Catcher in the Rye,” dissected frogs and have a passing familiarity with long division, it’s less likely they know about pre-payment penalties and why, to borrow a word from Holden Caulfield, they can be “crumby.”
In preparation for the real-world lessons ahead, here are some financial terms to consider sharing with recent grads, even those who think they already know it all.
Collateral: Lenders need to recover investments if borrowers stop paying. It’s why banks and financial firms can repossess vehicles and foreclose on homes.
Interest: Loans aren’t free. Interest is the cost of borrowing money. What you pay is based on numerous factors, such as your credit history. A tip for college students: If you take out student loans and request deferred payments, interest may build until you start making payments.
Minimum Down: Most loans require a down payment. Minimums vary based on the types of loans, though making larger down payments almost always lowers borrowing costs.
Pre-Payment Penalties: Most loans, including federal student loans, don’t have fees for paying off loans early. But make sure to check before signing the dotted line.
Return on Investment: Make sure borrowing money is worth it. College students should research post-graduation incomes in their fields to see if their educational investments are worth the costs.
Term: Term is the length of time it takes to repay loans with minimum payments. Longer terms usually mean lower monthly payments, but higher borrowing costs.
Here’s a final tip for college students. You may qualify for federal student loans with income-based repayment options. If so, you can settle the loan by making minimum payments for a period of time regardless of whether you repay everything you borrowed. Visit AAA.com/StudentLending to learn more.
For more money management tips, go to AAA.com/YourMoney.