Finance
How does a loan work?
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.
See it in motion.
Watch a 2-minute animated lesson that shows exactly how a loan works.
Step by step
- 1A lender gives you money (the principal) up front.
- 2You repay it over time in installments, plus interest.
- 3Interest is the lender's fee, usually a percentage per year.
- 4Collateral (like a house) can secure a loan and lower its rate.
Frequently asked questions
- 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.