Banking · Module 4 of 5
What borrowing costs
What a loan is made of, what the yearly rate means, and why paying only the minimum costs so much.
Key terms in What borrowing costs
- Negative amortization
Negative amortization occurs when a loan payment is too small to cover the interest due, so the unpaid interest is added to the balance and the amount owed grows. It can happen on certain loans that allow a minimum payment below the interest charge. Interest then accrues on interest that was previously added.
Source: Consumer Financial Protection Bureau, What is negative amortization?
- Minimum payment
A minimum payment is the smallest amount that must be paid each month on a loan, line of credit or other debt to keep the account in good standing. Lenders set it by formula, often tied to the balance and the interest charged. Paying only that amount leaves the rest of the balance outstanding.
Source: Consumer Financial Protection Bureau, Financial Terms Glossary
- Finance charge
A finance charge is the cost of consumer credit expressed as a dollar amount. Under the federal Truth in Lending rule, known as Regulation Z, it covers charges a lender imposes as part of, or as a condition of, extending credit, and so includes interest as well as certain fees and insurance premiums. Charges that would also apply in a comparable cash purchase are not counted.
Source: Consumer Financial Protection Bureau, 12 CFR 1026.4 Finance charge (Regulation Z)
Every term on Lever is in the money glossary.
About this module
What borrowing costs is part of Banking, one of 15 subjects in Lever. It’s a short run of 5 lessons, about 13 minutes in all, so you can finish it in one sitting.
Every lesson takes one idea at a time. You read it with the math worked out step by step, answer a question that puts it to use, then see why the right answer is right and why the others aren’t.
It’s for anyone who was never taught this, and you don’t need to know anything first. Every lesson is free. Lever works out what you already know, so you can start here or let your path bring you to it.
More in Banking
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1
Lending to people you know
Lending to friends and family, cosigning a loan, and what it can really cost you.
6 lessons -
2
What a bank actually does
What a bank does with your money, how it makes a living, and how to choose between a bank, a credit union and an online bank.
5 lessons -
3
Where the money sits
Checking, savings, fixed-term deposits and more: what each account pays, how easy it is to reach, and when switching is worth it.
8 lessons -
5
Moving money in and out
Getting paid, using ATMs, overdrafts, and the real difference between debit and credit cards.
7 lessons
Try this module
It’s part of Banking. Lever will bring it to you when you’re ready, or you can go straight there.