Borrowing, such as personal loans and credit cards, let you borrow a sum of money called the principal, which has to be repaid with interest. It is usually repaid in fixed monthly payments over a specific period of time. The interest rate compensates the lender for making the original sum of money available to you. Because of the interest component, the total amount you have to repay is more than the amount you borrowed.

Borrowings

You can borrow for a specific purpose, such as financing a new car, paying tuition fees, renovating a home or even paying higher interest debts. Borrowings are generally divided in to two types:

Secured borrowings are guaranteed by collateral, which is an item of equal or greater value than the amount of the loan, such as a car loan or a home loan. If a borrower cannot keep up with his loan arrangement and repay his loan, his collateral may be taken to pay off part, or all, of his debt.

Unsecured borrowings, or more often referred to as personal loans, do not require collateral and are made based on your credit score and ability to repay. An unsecured borrowing typically charges a higher rate of interest compared to a secured one.

Credit is a powerful tool that comes in different forms. By understanding how credit works, you will learn to manage it successfully and use it to your advantage.