Create an animated lesson
On requestThis article is free to read. Creating a lesson uses your daily or stored credits; review the language and settings before starting.
How does a loan work?
Quick answer
A loan works by a lender giving you a sum of money now that you repay over time, plus interest — the cost of borrowing. You typically repay in regular installments that cover both the original amount (principal) and the interest.
Step by step
- A lender gives you money (the principal) up front.
- You repay it over time in installments, plus interest.
- Interest is the lender's fee, usually a percentage per year.
- Collateral (like a house) can secure a loan and lower its rate.
People also ask
What is principal and interest?
Principal is the amount you borrowed; interest is the extra you pay for borrowing it.
What's the difference between secured and unsecured loans?
Secured loans are backed by collateral (like a car or house); unsecured loans aren't, so they usually cost more.
How is a loan repayment calculated?
Installments are set so that, over the term, you repay the principal plus the accumulated interest.
Part of the guide: Money Basics: Save, Borrow & Invest →