Unit 5: Borrowing and Getting Out of Debt

Last updated 10/14/2026 by

Andrew Latham

Summary:

Almost every young adult borrows for something: a car, a phone, a couch on buy now, pay later. The cost of a loan is in the details, not the monthly payment, and the most expensive loans are marketed hardest to people with the least money.

This is Unit 5 of 9 in Money 101 by SuperMoney, a free personal finance course. It takes about 1.5 weeks in a classroom, or 45 to 90 minutes on your own. Then take the five-question quiz below. Score 4 of 5 to mark the unit complete.

What you’ll learn

Explain the difference between an interest rate and an APR.
Compare loans by total cost, not monthly payment.
Explain how buy now, pay later works and when it becomes a problem.
Recognize high-cost credit and calculate its APR.
Compare the avalanche and snowball methods of paying off debt.
Explain what happens when payments are missed.

Key terms

Principal: The amount you borrow.
Loan term: How long you have to repay. Longer terms mean lower payments but more total interest.
Secured loan: A loan backed by something the lender can take if you do not pay, such as a car.
Unsecured loan: A loan backed only by your promise to pay, such as a credit card or most personal loans.
Co-signer: Someone who promises to repay if you do not. Co-signing makes you fully responsible for the debt.
Buy now, pay later (BNPL): Short-term installment plans at checkout, often four payments over six weeks.
Payday loan: A small, short-term loan due on your next payday, with fees that equal extremely high APRs.
Avalanche method: Pay minimums on everything, then put extra money toward the highest-interest debt first. Saves the most money.
Snowball method: Pay minimums on everything, then put extra money toward the smallest balance first. Builds motivation with quick wins.

Lesson 5.1: The true cost of a loan

Sellers like to ask “what monthly payment are you looking for?” because almost any purchase can fit a monthly payment if the loan is long enough. The better question is what will this cost in total?

Compare loans using the APR, which includes interest and many fees, and the total of payments, which lenders must disclose. A longer term lowers the payment but raises total interest, and on a car it can mean owing more than the car is worth for years.

Get a pre-approval from a bank or credit union before you shop for a car. Then you can compare the dealer’s financing offer with one you already have.

Lesson 5.2: Buy now, pay later and high-cost credit

Buy now, pay later splits a purchase into installments, often with no interest if every payment is on time. The risks: late fees, several plans running at once that are hard to track, and making it easy to buy things you could not otherwise afford. A good test: if you could not buy it with the cash you have today, BNPL is a loan, not a discount.

Payday loans, rent-to-own stores, car title loans and some cash advance apps with expedite fees or “tips” can cost the equivalent of 100% to 400% APR or more. To compare a fee to an APR: divide the fee by the amount borrowed, then multiply by how many times that period fits into a year.

Better options in an emergency: an emergency fund, a small-dollar loan from a credit union, a payment plan directly with the company you owe, or an employer pay advance.

Lesson 5.3: Getting out of debt

Two proven payoff methods both start the same way: pay the minimum on every debt, then put every extra dollar on one target. The avalanche targets the highest interest rate first and saves the most money. The snowball targets the smallest balance first and gives you a quick win that keeps you going. The best method is the one you stick with.

Two tools can help: a debt consolidation loan at a lower rate than your cards, or a 0% balance transfer card (watch the transfer fee and the date the promotion ends). Both only work if you stop adding new debt.

If you miss payments, expect late fees, a possible penalty APR and, after 30 days, a mark on your credit report. Unpaid debts can be sent to collections. Collectors must follow federal law: they cannot threaten you or call at unreasonable hours, and you can ask them to verify the debt in writing. If you are falling behind, call the lender before you miss a payment. Hardship plans are common.

Worked example: the same car, two loans

Assumes $25,000 financed at 8% APR. Your rate depends on your credit, the lender and whether the car is new or used.

36-month loan	$783 a month, about $3,203 total interest
72-month loan	$438 a month, about $6,560 total interest
Cost of the lower payment	about $3,357 more in interest

Takeaway: The 72-month payment feels easier, but it costs twice the interest and keeps you paying for six years on a car that loses value every year.

Activity: Car-buying simulation

Pick a real used car listing under $20,000. Get or estimate two financing quotes: one from the dealer and one from a credit union. Present which has the lowest total cost and the trade-offs of a longer term.

Car, price and mileage
Down payment
Quote 1: lender, APR, term, monthly payment, total interest
Quote 2: lender, APR, term, monthly payment, total interest
Insurance estimate (call or get an online quote with a parent)
Your choice and why

The printable worksheet and the sample documents for this activity are in the Money 101 course book (PDF).

Reflect: Think of an ad that advertised a low monthly payment. What information was missing?

Up next: Unit 6: Paying for College and Career Training | Previous: Unit 4: Credit Reports, Scores and Credit Cards | Course overview

Andrew Latham

Andrew is the Content Director for SuperMoney, a Certified Financial Planner®, and a Certified Personal Finance Counselor. He loves to geek out on financial data and translate it into actionable insights everyone can understand. His work is often cited by major publications and institutions, such as Forbes, U.S. News, Fox Business, SFGate, Realtor, Deloitte, and Business Insider.

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