Lesson 5: Debt & Loans

Debt & Loans Reference

Types of Loans

• Mortgage: secured by home; 15 or 30-year term; typically lowest rates (6-8%).
• Auto loan: secured by vehicle; 3-7 year term; 5-10% rates.
• Student loan: federal (4-8%) or private (variable); income-driven repayment options.
• Personal loan: unsecured; higher rates (8-20%); flexible use.
• Credit card: revolving debt; 18-28% APR; avoid carrying balances.

Monthly Payment Formula

M = P × [r(1+r)^n] / [(1+r)^n − 1]

where P = principal, r = monthly rate, n = total payments

Amortization

Each payment covers interest first, then principal. Early payments are mostly interest. Over time, more goes to principal. Extra payments drastically reduce total interest paid.

Debt Repayment Strategies

• Avalanche method: pay minimums on all, extra to highest-rate debt. Saves most money mathematically.
• Snowball method: pay minimums on all, extra to smallest balance. Psychological wins motivate.
• Good debt vs Bad debt: low-rate debt for appreciating assets (house) = generally ok. High-rate consumer debt = avoid.

Student Loan Advice

• Borrow only what you need; each $10,000 costs ~$100+/month in payments
• Federal loans offer income-driven repayment and forgiveness programs
• Expected salary ÷ 10 = max annual student loan payment you can comfortably afford