How Loans Work
The basics of borrowing money
I was at a furniture store this weekend buying a mattress for my daughter when the salesperson offered a payment plan:
“Only $50 per month.”
That sounded reasonable — until we did the math.
$50 × 24 months = $1,200
The $1,000 mattress now cost $1,200.
That extra $200 is the cost of borrowing money.
Monthly payments can make things feel more affordable than they really are — and often entice people to borrow more than they should.
What a Loan Really Is
A loan is simple:
You get money today.
You pay it back over time.
But you also pay interest — the price of using someone else’s money.
The Three Parts of Any Loan
Every loan has three basic pieces:
Principal
The amount you borrow
Interest Rate
The cost of borrowing
Loan Term
How long you take to repay it
A Simple Example
Suppose you borrow $1,000 at 6% and repay it over 12 months.
Your monthly payment is about $86.
Month 1
Interest: $1,000 × 0.5% = $5.00
Principal: $86 − $5 = $81
New balance: $1,000 − $81 = $919
Month 2
Interest: $919 × 0.5% ≈ $4.60
Principal: $86 − $4.60 ≈ $81.40
New balance: $919 − $81.40 = $837.60
…
Month 12
Interest: $85.60 × 0.5% ≈ $0.40
Principal: $86 − $0.40 ≈ $85.60
New balance: $85.60 − $85.60 = $0
What You Should Notice
You start paying principal immediately
Interest is highest at the beginning because the balance is highest
Each month:
interest goes down
principal paid goes up
Nothing changes later in the loan — the math just shifts as the balance gets smaller.
Longer Loans Don’t Scale the Way You Might Expect
Extending the loan lowers your monthly payment — but it also means you repay the principal more slowly, so you pay interest for longer.
Same math as before — just stretched over more time.
Suppose you borrow $300,000 at 6% to purchase a home:
15 years → ~$2,530/month
30 years → ~$1,800/month
50 years → ~$1,580/month
Going from 15 → 30 years cuts the payment a lot.
But going from 30 → 50 years barely moves it.
The Tradeoff
Extending the loan keeps lowering the payment — but by less and less as the term gets longer.
Meanwhile, total interest keeps rising:
15-year loan → ~$155k interest
30-year loan → ~$348k interest
50-year loan → ~$648k interest
Same house. Same rate. Just more time.
Extending a loan dramatically increases total cost — but only modestly reduces the monthly payment after a certain point.
Final Thought
Borrowing responsibly starts with understanding how loans actually work.
Loans don’t make things cheaper — they just make the price easier to ignore.