Open Finance Academy

Banking, credit, and lending

Learn how deposit accounts work, what borrowing costs, how lenders assess applications, and what to examine when repayments become difficult.

← All knowledge areas · Glossary

No banking experience is needed. You will use basic arithmetic and percentages. New finance terms are bold, explained on first use, and linked to the glossary, which links back to each explanation.

Example assumptions

The dollar amounts and rates are invented teaching examples. Each example is independent. Unless stated otherwise, assume no fees, taxes, additional borrowing, missed payments, or early repayments. For repayment schedules, interest is calculated monthly on the opening unpaid principal, payments arrive at month-end, and the annual interest rate is divided by twelve. Actual contracts may calculate interest daily or use different conventions.

General explanations are intended to be useful across countries. U.S. deposit-insurance, disclosure, and bankruptcy examples are labeled and use official sources checked September 13, 2026. Check local rules and the specific agreement before applying them elsewhere.

In this lesson

  1. What banks and credit unions do
  2. Choose an account for its purpose
  3. Understand deposit protection
  4. Understand the borrowing agreement
  5. Follow a loan repayment
  6. Compare total cost, not only the payment
  7. How lenders assess an application
  8. Borrowing for a business
  9. When repayment becomes difficult
  10. Check your understanding

What banks and credit unions do

Sam receives pay into an account, uses it to pay bills, and considers borrowing for equipment. The account and the borrowing agreement serve different purposes even if the same institution offers both.

A bank is a regulated institution that accepts deposits and provides services such as payments and lending. A credit union is a member-owned financial cooperative offering similar services. Membership conditions apply. Ownership structure alone does not establish which provider has better terms; compare actual fees, access, and service. See the Bank of England’s banking introduction and the U.S. NCUA’s credit union comparison.

A deposit is money held in an account that the institution owes the account holder under the account terms. A $500 deposit is a resource for Sam and an obligation for the bank. The bank does not normally keep those exact notes in a separate box with Sam’s name on it.

In modern banking, making a loan can create a matching deposit in the borrower’s account. Banks still face funding, payment, loss-absorption, regulatory, and commercial constraints; this is not unlimited free money. The Bank of England explains money creation. For borrowers, the new spendable balance arrives with a repayment obligation.

Choose an account for its purpose

Interest is money paid for the use of money: you may receive it on deposits or pay it on borrowing. An interest rate expresses that amount as a percentage over a stated period.

Account Purpose and questions to ask
Checking account A deposit account for everyday receipts and payments, also called a current account in many countries. Check payment access, minimum balances, fees, and when deposits become available.
Savings account A deposit account for setting money aside, often earning interest. Check the rate, withdrawal conditions, and any fees.
Term deposit A deposit agreed for a stated period, such as a certificate of deposit (CD). Check when it matures, whether it renews automatically, and any early-withdrawal restrictions or penalties.

The CFPB provides bank-account guidance and an explanation of certificates of deposit.

Annual percentage yield (APY) is an annualized measure of deposit interest earnings that includes compounding under stated assumptions. It differs from a rate that does not include the effect of adding interest to the balance. See the CFPB’s U.S. APY calculation rules.

Suppose an account earns a fixed 1% every month, with interest kept in the account, no fees, and no other activity. Start with $1,000:

The effective annual yield is ($1,126.825… ÷ $1,000) − 1 = about 12.68%, not 12%. This unusually high rate is chosen for arithmetic, not as a current savings offer. A quoted APY does not cancel account fees or guarantee that a variable rate will last a year.

An overdraft occurs when an institution pays a transaction despite insufficient available money. If Sam has $80 available and the bank pays a $100 transaction, Sam owes $20 before any charges. The institution may instead decline the transaction. Fees and consent rules depend on the account and jurisdiction. See the CFPB’s overdraft explanation.

Understand deposit protection

Deposit insurance protects eligible deposits if an insured institution fails, subject to limits and conditions. It is not a guarantee against every type of financial loss.

U.S. example: Federal Deposit Insurance Corporation (FDIC) coverage is generally $250,000 per depositor, per insured bank, for each account ownership category. Accounts in the same category at the same bank are combined. Investments such as stocks and mutual funds are not FDIC-insured deposits, even if sold at a bank. See FDIC coverage rules.

Suppose Sam alone owns $180,000 in checking and $90,000 in savings at one FDIC-insured bank. Both are in the single-account ownership category, with no other balances or accrued interest:

Combined deposits = $180,000 + $90,000 = $270,000.

Insured amount = $250,000; amount above the limit = $20,000.

Opening another account in the same category at that same bank does not create another $250,000 of coverage.

Federally insured U.S. credit unions have coverage administered by the National Credit Union Administration (NCUA), generally $250,000 per share owner, per insured credit union, for each ownership category. Check the institution and account eligibility in the NCUA’s insured-funds guide.

For an app or intermediary, identify the legal institution actually holding the money and the conditions of any claimed protection. Outside the United States, check the local scheme’s coverage rather than importing these limits.

Understand the borrowing agreement

Credit lets someone obtain money, goods, or services now with an agreement to pay later. Debt is the amount owed. A loan supplies money under a repayment agreement, usually with charges. The principal is the amount borrowed, separate from interest; remaining principal is the borrowed amount still unpaid. The loan term is the time until scheduled final repayment.

Two common structures are:

A lender may require collateral: property pledged to support repayment. A secured loan has specified collateral; an unsecured loan does not. Unsecured does not mean repayment is optional or that the lender has no legal remedies. The CFPB explains personal installment loans and security.

A mortgage is a loan secured by real property, often a home. Failure to meet the agreement can put that property at risk. Housing payments may include taxes and insurance as well as loan repayments, so check what the quoted payment includes. The CFPB’s U.S. Loan Estimate guide shows information borrowers can use to compare mortgage offers.

Follow a loan repayment

A fixed interest rate stays unchanged for a specified period; a variable interest rate can change under the agreement’s rules. A fixed period may be shorter than the full loan term. See the CFPB’s fixed and adjustable mortgage explanation.

Sam borrows $1,200 for three months at a fixed 12% annual rate, calculated as 12% ÷ 12 = 1% per month. The agreement requires $400 of principal each month plus that month’s interest. This is an equal-principal example; the total payments decline rather than staying level.

Amortization in lending means paying down principal through scheduled payments.

Month Opening principal Interest at 1% Principal repaid Total payment Ending principal
1 $1,200 $12 $400 $412 $800
2 $800 $8 $400 $408 $400
3 $400 $4 $400 $404 $0
Total   $24 $1,200 $1,224  

Month one: $1,200 × 0.01 = $12 interest. The $412 payment covers $12 interest and reduces principal by $400. Month two’s interest is $800 × 0.01 = $8, because less principal remains.

Many loans instead use equal total payments. With a fixed rate and no changes, the interest share generally falls and the principal share rises as the balance is repaid. Some agreements postpone principal repayment, leaving a large final amount due. Read the schedule rather than assuming every payment reduces debt in the same way. The CFPB’s mortgage terms guide explains amortization and repayment structures.

Compare total cost, not only the payment

Keep the $1,200 loan and 1% monthly rate, but compare repayment over three months with six months. Both use equal principal repayments and have no fees.

Term Principal repaid each month First / last payment Total interest Total repaid
Three months $400 $412 / $404 $24 $1,224
Six months $200 $212 / $202 $42 $1,242

For six months, interest is $12 + $10 + $8 + $6 + $4 + $2 = $42. Smaller payments give short-term breathing room, but keeping principal outstanding longer costs $42 − $24 = $18 more in this example.

Annual percentage rate (APR) is an annualized borrowing-cost measure calculated under applicable disclosure rules. For U.S. installment products such as mortgages, it can include specified fees as well as interest. It is not interchangeable with APY, and it does not necessarily include every possible charge. See the CFPB’s interest-rate and APR comparison.

A fee can change the comparison

In a separate one-year example, compare two $1,000 loans with the full principal repaid at year-end and no interim payments. Interest is charged on the full principal for that year. Loan A’s fee is paid separately at the start; no other charges apply.

Offer Annual interest rate Interest for the year Upfront fee Total borrowing cost
A 6% $60 $30 $90
B 8% $80 $0 $80

A’s lower advertised interest rate produces a higher dollar cost: $60 + $30 = $90, versus $80 for B. These totals are not APR calculations; a disclosed APR also accounts for payment timing under its rules.

Compare the cash actually available, repayment dates, total charges, rate-change rules, costs of paying early, and consequences of late payment. Compare APRs on a consistent product and jurisdiction basis, alongside the total cost and an affordable payment schedule.

How lenders assess an application

Underwriting is the lender’s evaluation of the borrower and proposed agreement. Credit risk is the possibility that agreed payments will not be made. A lender may consider earnings, existing obligations, repayment history, collateral, and the proposed use of funds.

A credit report records borrowing accounts and payment history. A credit score is a model’s numerical estimate of repayment risk, often based on that report. Different models can produce different scores. Neither is a measure of a person’s worth, and a score alone does not show whether a payment fits their household needs. See the CFPB’s report and score comparison.

The debt-to-income ratio (DTI) divides monthly debt payments by gross monthly income—income before tax and payroll deductions. Suppose a lender includes $900 of existing monthly obligations and a proposed $300 payment, against $4,000 gross monthly income:

DTI = ($900 + $300) ÷ $4,000 × 100 = 30%.

This is not a universal approval threshold. Included obligations and qualifying limits vary. The CFPB explains DTI.

Approval is not the same as affordability. If take-home pay is $3,100, total debt payments are $1,200, and separate living costs are $1,600, only $3,100 − $1,200 − $1,600 = $300 remains before savings or unexpected costs. Ensure costs are not counted twice, then consider how the plan handles a fall in income or a variable-rate increase.

Borrowing for a business

A business lender needs to understand how the business will repay. Cash flow is money entering and leaving over time. Sales or accounting profit do not guarantee cash will be available on a payment date. The SBA’s U.S. lending overview identifies repayment ability and business purpose as important considerations.

Suppose a repair business expects $6,000 in customer receipts next month and $4,800 of other cash payments, before a new $800 loan payment:

$6,000 − $4,800 − $800 = $400 remaining cash from that month’s activity.

If receipts are 20% lower, they become $6,000 × 0.80 = $4,800. With other payments unchanged, the business is $800 short for that month’s activity. An opening cash reserve could cover the gap temporarily, but repeated shortfalls would need another solution.

Check whether an owner must personally promise repayment, whether business property is pledged, and when cash is expected to arrive. These terms can expose personal or business resources beyond the amount of the monthly payment. Use the Accounting and financial analysis lesson to examine the supporting statements.

When repayment becomes difficult

Delinquency means a required payment is overdue. Default means failing to meet obligations as defined by the agreement and law; it can involve missed payments or other breaches. There is no single timing rule that applies to every debt. Consequences can include extra charges, credit reporting, collection, and enforcement against collateral, depending on the product and jurisdiction.

Contact the lender or the organization collecting payments promptly when a problem develops. Ask what assistance exists, whether interest and fees continue, when deferred amounts become due, and how any change will be reported. Get the agreed terms in writing. The CFPB’s personal loan guidance discusses missed payments and contacting lenders.

Refinancing replaces an existing debt with a new loan. Debt restructuring changes an existing obligation’s terms, by agreement or legal process. A lower payment can come from a longer term and cost more overall. Neither option should be assumed available, and a temporary payment pause does not necessarily cancel amounts owed. The CFPB’s refinancing guide explains the tradeoff between lower payments and a longer repayment period.

Bankruptcy is a legal process for addressing debts that cannot be paid. It may involve repayment arrangements, sale of assets, or relief from some obligations. Rules differ by jurisdiction. In the United States, not every debt is discharged, and some valid claims against pledged property can survive. See U.S. Courts’ bankruptcy basics and explanation of discharge. Understanding a particular case requires local legal guidance.

For structured help reviewing repayment options, the Certifications page explains financial counseling credentials. A credential is one point to check alongside service scope, costs, and the provider’s background.

Check your understanding

Try these before reading the answers. Numerical questions are independent and use the assumptions stated in each question.

  1. Sam has $100,000 in checking and $170,000 in savings, both solely owned in the same ownership category at one FDIC-insured bank. With no other deposits or accrued interest, how much is above the standard limit?
  2. In the three-month repayment example, why does month two’s interest equal $8 rather than $12?
  3. On a $2,000 opening principal balance, monthly interest is 1%. If a $120 payment first pays that interest and then principal, with no other charges, what is the ending principal?
  4. Why does extending the example loan from three to six months raise total interest even though the rate is unchanged?
  5. Loan A has $60 interest and a $30 upfront fee; Loan B has $80 interest and no fee. Under the stated one-year terms, which has lower dollar borrowing cost?
  6. Gross monthly income is $5,000 and included monthly debt payments are $1,500. What is DTI? Does that number establish affordability?
  7. The repair business receives $5,400 rather than $6,000, with $4,800 of other cash payments and an $800 loan payment. What is the month’s cash surplus or shortfall before using any opening balance?
  8. Does an unsecured loan remove the obligation to repay? Does bankruptcy automatically remove every debt?

Answers

  1. $20,000. Combined deposits are $270,000; subtract the $250,000 limit. Separate account names do not create separate coverage in the same ownership category at the same insured bank.
  2. Only $800 of principal remains. Month one’s $412 payment includes $12 interest and $400 principal. Month two’s interest is $800 × 0.01 = $8.
  3. $1,900. Interest is $2,000 × 0.01 = $20. Principal repaid is $120 − $20 = $100. Ending principal is $2,000 − $100 = $1,900.
  4. Principal remains outstanding longer. Smaller principal repayments produce $42 of interest over six months versus $24 over three, an $18 increase.
  5. Loan B. A costs $60 + $30 = $90; B costs $80. The lower headline interest rate does not offset A’s fee.
  6. 30%, but no affordability conclusion by itself. $1,500 ÷ $5,000 × 100 = 30%. Taxes, living costs, irregular expenses, and financial resilience also matter.
  7. A $200 shortfall. $5,400 − $4,800 − $800 = −$200. An opening balance could cover it, but this month’s activity did not generate enough cash.
  8. No to both. Unsecured describes the absence of specified collateral, not freedom from repayment. Bankruptcy outcomes depend on the law, type of debt, and case.

Terms introduced in this lesson

Follow these definitions to revisit their meaning and return to the explanations above.

Keep learning

Revisit Money and financial fundamentals for interest and compounding. Personal finance and financial wellbeing connects debt payments with budgets and financial goals. Investing and portfolio management distinguishes investment decisions from holding money in deposit accounts.

Payments and money movement follows money between accounts and across payment systems. Corporate finance and business funding compares business funding choices and connects borrowing to cash forecasts and investment decisions.

Planned follow-up lessons