1. Bank Loans SS.8.FL.4.1 Explain that people who apply for loans are told what the interest rate on the loan will be. An interest rate is the price of using someone else’s money expressed as an annual percentage of the loan principal. Gr. 5 Financial Literacy

2. Image Source: http://i.imgur.com/a2BZ3su.png Grade 5 Financial Literacy SS.8.FL.4.1 How do you calculate interest? How do loan terms impact the borrower? Essential Question

3. What information can be gained by analyzing the cartoon? (LAFS.5.RI.3.7) Image Source: http://s89.photobucket.com/user/CelesteBarbier/media/Work/MortgageToon.gif.html Grade 5 Financial Literacy SS.8.FL.4.1

4. Image Source: http://carolinacashfast.com/wp-content/uploads/2016/03/no-credit-check-loan-566x272.jpg Grade 5 Financial Literacy SS.8.FL.4.1 Few Americans can afford to pay cash for their car or home. Cars and homes are very expensive. The average price of a new car starts at about $20,000 while the average price of a home can range anywhere from $150,000 to millions of dollars. Banks make it possible for us to make such purchases now and repay over time. The more money you borrow, the more time it will take you to pay back the loan. Cars are usually repaid within five years and homes take upwards of thirty years. Most of us look forward to the day we buy our first car and home.

5. Grade 5 Financial Literacy SS.8.FL.4.1 Banks began a very long time ago – about the time when Columbus was sailing to America. The word “bank” comes from the Italian word “banco” which means bench. Moneylenders sat on benches in the marketplace and waited there to do business with other people. Image Source: https://upload.wikimedia.org/wikipedia/commons/e/ee/UsuryDurer.jpg History of Banks

6. Grade 5 Financial Literacy SS.8.FL.4.1 Banks are businesses that provide a service in the community. People use banks for two main purposes – to save money and borrow money. When somebody borrows money from the bank, the transaction is called a loan. Borrowing money is not free. The price you pay for borrowing money is known as interest. Banks charge you a percentage of the amount borrowed. Banks also pay interest to patrons who save their money there. Do you think banks pay more interest for saving money or charge more interest borrowing money? Why? How Banks Work Banks lend money. Interest is a fee paid for borrowing money. When you save your money in the bank, the bank pays you interest.

7. Grade 5 Financial Literacy SS.8.FL.4.1 Banks Impact on the Community Banks lend money for a variety of purposes. In addition to buying a home or a car, banks lend money to people who want to start up new businesses, expand existing businesses, or make improvements to their existing homes. Banks will finance just about anything, just as long as you are creditworthy. The spending generated as a result of borrowing money, helps the economy by providing income for business owners and workers who in turn spend or save that money, which leads to more income for other people and more money for banks to lend.

8. Grade 5 Financial Literacy SS.8.FL.4.1 Common Loan Repayment Terms There are many different kinds of loans, each with their own interest rates and repayment terms. Let’s explore a few of the most common. Automobile Loan Home Loan Education Loan Refinance Loan Pay for a car 4-6 years Pay for a home 10-30 years Pay for college 10-30 years Modify terms of existing loan Lower interest rate REMEMBER: The longer it takes you to pay back, the more interest you will pay.

9. Grade 5 Financial Literacy SS.8.FL.4.1 Costs Associated with Finance Terms Automobile Loan Home Loan Education Loan Terms: $ 20,000 5% APR 4 years $ 200,000 5% APR 30 years $5 0,000 5% APR 20 years Total Interest : $2,108.12 Total Cost: $21,108.12 48 Monthly Payments: $460.59 Total Interest: $186,511.00 360 Monthly Payments: $1073.64 Total Cost: $386,511.00 360 Monthly Payments: $329.98 Total Interest: $29,194.69 Total Cost: $79,194.69 It’s important to understand your loan terms when borrowing money. Annual Percentage Rate (APR) is the amount of interest you will pay annually. Look at the true cost of borrowing of each of the three loans below. What do you notice?

10. Don’t be fooled! Analyze those loan terms carefully. Grade 5 Financial Literacy SS.8.FL.4.1 LOAN OPTION B: You borrow $20,000 with 4% APR and repay within 5 years. When shopping for a loan, you need to carefully consider the loan terms as they greatly your monthly payments and final cost. Let’s do some math to help us analyze two car loan scenarios and decide which is the best option for you. $2400 interest 22,400 $467 per month Step 1: Calculate the APR 20,000 x.03 = _____ 600 Step 2: Multiply the APR by the number of years. 600 x 4 years = _____ 2400 Step 3: Add this amount to the cost of the loan. 2400 + 20,000 = _______ 22,400 Step 4: Divide by the number of months owed by the number of months financed to calculate your approximate monthly payments. 22,400 / 48 = _______ $467 LOAN OPTION A: You borrow $20,000 with 3% APR and repay within 4 years. Step 1: Calculate the APR 20,000 x.03 = _____ 800 Step 2: Multiply the APR by the number of years. 800 x 5 years = _____ 4000 Step 3: Add this amount to the cost of the loan. 4000 + 20,000 = _______ 24,000 Step 4: Divide by the total amount owed by the number of months financed to calculate your approximate monthly payments. 24,000 / 60 = _______ $400

11. Loan Amortization Grade 5 Financial Literacy SS.8.FL.4.1 It’s important to note that as you decrease the principal amount owed, your interest fees will decrease as well. Remember interest is calculated based on the current amount you owe. A loan amortization calculator is a great tool to use to help you analyze your loan terms. There are many available online. Note what happens to the interest charged and principal balance over time. $2400 interest 22,400 $467 per month LOAN OPTION A: You borrow $20,000 with 3% APR and repay within 4 years.

12. How to Beat the Bank and Save Grade 5 Financial Literacy SS.8.FL.4.1 Your goal when you borrow money from the bank is to repay the principal balance as quickly as possible so that you pay less interest over time. If you are able to send additional money each month you will not only lower the amount of interest you pay over the life of the loan, but you will repay your debt faster. Look at the benefits of sending an additional $50 to your monthly payment. $2400 interest 22,400 $467 per month

13. Now it’s your turn to practice calculating interest. Grade 5 Financial Literacy SS.8.FL.4.1 Follow the steps below to help you calculate the interest, your monthly payments, and the total amount paid. $2400 interest 22,400 $467 per month Step 1: Calculate the APR Amount borrowed x the APR Step 2: Multiply the APR by the number of years. APR x years Step 3: Add this amount to the cost of the loan. Interest + amount borrowed Step 4: Divide by the total amount owed by the number of months financed to calculate your approximate monthly payments. Total amount owed / number of months LOAN TERMS You borrow $______ with ___% APR and repay within ___ years.

14. What information can be gained by analyzing the cartoon? (LAFS.5.RI.3.7) Image Source: http://s89.photobucket.com/user/CelesteBarbier/media/Work/MortgageToon.gif.html Grade 5 Financial Literacy SS.8.FL.4.1

15. Sources & Supplemental Resources Lesson Content adapted from: The History of Banking and Saving https://www.mymetrobank.com/filestore/Grade2-3HistoryofBankingandSavings.pdf Article and video with suggestions on how to help kids understand how loans work: https://www.bettermoneyhabits.com/teaching-kids-money/credit-basics-for- kids/help-your-child-understand-how-loans-work.html Page 64 of Hands on Banking guide has lesson ideas and activities on interest http://www.handsonbanking.org/en/resources/Kids_T_Guide.pdf Grade 5 Financial Literacy SS.8.FL.3.7