Managing my money for young adults
Managing my money for young adults

Start this free course now. Just create an account and sign in. Enrol and complete the course for a free statement of participation or digital badge if available.

2 Debt – some basic facts

When someone acquires a debt the money they have to repay to the lender consists of three elements.

The amount originally borrowed. This is normally referred to as the principal sum, or sometimes the capital sum. Let’s say £10,000 is borrowed for 5 years to buy a car. How will this be repaid? There are two usual ways to repay the principal sum (the £10,000): either in one amount at the end of the term of the loan (five years), or in stages over the life of the loan. The first way is often referred to as an ‘interest-only loan’ and the second a ‘repayment loan’. In the first way, the borrower will need to build up savings to pay off the loan.

The important additional cost of having debt. This is the interest that has to be paid on the debt. In effect, interest is an additional charge on the repayment of debt. It is normally expressed as a percentage per year – for example 7% per annum, more commonly abbreviated to 7% p.a.

Charges. There might be charges associated with taking out, having or repaying debt. These will be explored in more detail later.

Let’s look at interest payments in more detail. If £10,000 is borrowed and no repayments of this principal sum are made during the year, and the interest rate is 7% p.a. with interest being paid once a year at the end of the year, the interest charge for that year is £700.

So, provided the principal sum owed to the lender remains at £10,000 and the interest rate is 7% p.a., the borrower will have to pay £700 each year to the lender. This is an example of a simple interest calculation where the interest rate is applied just to the original sum borrowed.

Take your learning further

Making the decision to study can be a big step, which is why you'll want a trusted University. The Open University has 50 years’ experience delivering flexible learning and 170,000 students are studying with us right now. Take a look at all Open University courses.

If you are new to University-level study, we offer two introductory routes to our qualifications. You could either choose to start with an Access module, or a module which allows you to count your previous learning towards an Open University qualification. Read our guide on Where to take your learning next for more information.

Not ready for formal University study? Then browse over 1000 free courses on OpenLearn and sign up to our newsletter to hear about new free courses as they are released.

Every year, thousands of students decide to study with The Open University. With over 120 qualifications, we’ve got the right course for you.

Request an Open University prospectus371