3.2 Borrowing, Credit, and Debt

People borrow mainly to buy things that cost more than their income and savings, like a car, a home or college. They also borrow to handle emergencies, to keep their savings intact or just for convenience, such as using a credit card.

Borrowing creates a debt, a personal liability, that you repay with interest. Interest is the price of borrowing money. The rate and repayment terms depend on the lender, the type of loan, the amount and your credit history.

A secured loan is backed by collateral, something the lender can take if you don't pay. Car loans and mortgages (home loans) are secured by the car or house itself. Unsecured loans, like most personal loans and credit cards, have no collateral, so they usually charge higher rates.

• Banks and credit unions lend out money that savers, businesses and others have deposited.
• Credit card companies, stores and mortgage lenders also lend to consumers.
• Alternative financial services, such as payday loans, check-cashing services and instant tax refunds, lend to people who may not qualify elsewhere, usually at much higher cost.

Federal laws require lenders to state credit terms, such as the annual percentage rate (APR) and fees, clearly. Other laws limit what debt collectors can do and ban lending discrimination based on traits like race, sex or religion. The Consumer Financial Protection Bureau (CFPB) enforces many of these rules.

Every lender risks default, the borrower not repaying. So lenders prefer people with low existing debt, high income and savings, and a record of paying on time. Lenders that accept riskier borrowers charge higher interest to make up for the risk.

To judge creditworthiness, lenders look at your income, savings, existing debt and your credit report. Credit reports are compiled by credit bureaus (Equifax, Experian and TransUnion), which collect information whenever you deal with lenders: opening accounts, taking out loans, applying for cards and making payments. A credit report comes with a credit score, a number summarizing how you've used credit. Most credit scores, including the common FICO scores, run from 300 to 850, and higher is better (CFPB, consumerfinance.gov, checked October 2026). Lenders, landlords, insurers, employers and government agencies may check your report.

Debt payments take income that could go to saving or other needs, and bigger debts or higher rates mean bigger payments. People fall behind when they lose income or take on payments they can't afford. Borrowers limit the damage in a few ways:

• Keeping a high credit score: paying bills on time, paying down debt and using credit cards sparingly.
• Paying off high-interest debt, like credit card balances, as quickly as possible.
• Getting better terms: comparing offers from several lenders, and making a down payment (paying part of the price up front) on big purchases so less is borrowed.
• If debt becomes unmanageable, for example if property is being seized, debt management help may be available. Bankruptcy is a legal process that wipes out some debts and sets up a repayment plan for others, at a heavy cost to your credit.