Preparing your child to make borrowing decisions
Taking out loans or credit cards can be an important learning experience for your children, but it is important to teach them to avoid costly and impulsive buying decisions. Here are some key questions teens can ask themselves before borrowing money.
[Visual of title: Preparing your child to make borrowing decisions]
Most teens probably know
[Visual of two people at a table talking about a loan. A tag is attached to the speech bubble, reading “interest.”]
that debt is money owed by a borrower to a lender, but they might not understand that a loan isn’t free money—it actually costs money too.
[Visual of a loan, with yes/no stickers hovering above it.]
And knowing when it might be a good idea to borrow money and when it might not be can be a little complicated.
When your teen is considering borrowing money to make a purchase, he can ask himself a few questions:
Is what he’s buying truly necessary?
Does he have room in his budget to cover the monthly payments?
Could he save money for a few months to pay for it instead of borrowing for it?
And, after totaling the additional amount of money he’ll pay in interest over time—will the purchase still be worth it?
With these questions in mind, you can explore some borrowing decisions with your teen.
For example, taking out student loans to pay for college could be a good reason to borrow money if she graduates, if the education leads to a job with a good salary, and if her loan payments are manageable.
On the other hand, if the amount taken out in loans is overwhelming, or if the student never graduates, repaying these loans could become a significant burden.
[Visual of a super: Debt for “wants”]
Another example would be taking on large amounts of debt to go on a big vacation or a shopping spree. These might not be the best things to go into debt for because they’re examples of things that aren’t really necessary– these are things your teen might want, but not necessarily need.
Not only can the repayments stress your teen’s future budget–– but, with the added interest, those purchases will end up costing him a lot more than if he had saved up for them in advance.
Another example to explore could be payday loans. These are basically short-term cash loans that a borrower is expected to pay back with her next paycheck.
[Visual of a stack of cash divided into interest and principal, with interest outweighing principal.]
But these loans tend to have very high interest rates and fees and the result of taking out one of these loans is that the borrower ends up taking home a lot less of her pay.
[Visual of the interest growing into a much higher percentage of the stack of cash.]
And, unfortunately, many payday borrowers get stuck in a cycle of debt that causes them to take out loan after loan. A better idea would be keeping some money saved for emergencies so your teen never has to resort to a payday loan for unexpected expenses.
In the next few years your teen might encounter offers for different types of debt. Things like credit card offers, student loans, or auto loans.
By teaching teens to stop and ask themselves a few questions about:
whether the loan is necessary, do they have room in their budget to cover future payments, could they save instead of borrow, and if borrowing for a purchase is worth it after paying the extra interest and fees, you can help them avoid borrowing money impulsively.
And ultimately, if your kids are good at managing debt, they’ll be in a much better position when the stakes are higher.
Better Money Habits®
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