Finance Jargon Buster

Money is all about trust. When you lend someone money, you do it based on trust. After all, the word "credit" comes from the Latin "credo," which means "I trust." 

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If you lend money to a friend or family member, you might trust them to pay you back. But what about lending money to a stranger? That’s where things can get a little more complicated, so let’s learn about a few key terms:
 

Interest Rates: Banks charge interest based on how much they trust you to pay back the loan and how much it costs them to lend you the money. You usually borrow money because you don’t have it right now or need your cash for something else. This means the lender is taking a risk, hoping you’ll be able to earn the money to pay them back.

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Secured Loans: You can offer something valuable as collateral to help build trust with the lender. Collateral is an asset you own, like your house or car, that you promise to give to the lender if you can't repay the loan. This type of loan is called a "secured loan."

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Secured loans often come with lower interest rates as they are less risky for lenders, making borrowing cheaper. However, if you don’t repay the loan as agreed, the lender can take the collateral and sell it to get their money back.
 

Good to know: Collateral is usually worth more than the loan amount to ensure the lender can recover their money. This is in case they need to sell it quickly and might not get its full value.

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Unsecured Loans: These loans don't require any collateral. If you don’t repay an unsecured loan, the lender can’t take your specific belongings. However, they can take legal action and force you to sell your assets to repay any debt.