Loans Demystified: Unraveling Interest Rates and Principal Payments

Talking about loans can feel overwhelming, with so many details and complexities involved. But don't worry—we're here to simplify it for you! In this post, we'll break down the key aspects of loans, making it easier to understand and navigate your options.

When taking out a loan at a commercial bank, such as JP Morgan, Bank of America, etc., you are essentially asking to take out an amount known as the principal. For example, if you request a loan for $30,000, that is known as the principal. Banks hand out this principal on an agreement to an interest rate. Interest rates are a contingent measure based on the economy or specific institution rates so make sure to do your research on them. When agreeing to an interest rate and loan principal, you will notice that most of your first payment (installment) is going mostly toward your interest. Going with our previous example, if you take out a loan for $30K with a 4% interest rate that is paid in monthly installments, the first payment would be taking $100 into interest rate and only $2,454.50 going towards principal. As you continue your monthly payments, the amount of money going into interest decreases whereas the amount going into principal increases, helping you tackle down loan payments.

If you are taking out a loan for a company, many banks will be doing “secured lending”. This refers to if a business fails to repay its loans or goes bankrupt, the bank will be able to recover some of its loan through the company’s assets. For example, if an ice cream company borrowing a loan declares bankruptcy, the bank has the right under the secured lending agreement to take back ice cream machines or any assets purchased through the loan. 

Stay tuned to learn more! If you want to learn more about interest rates, read our blog talking about the roller coaster of interest rates!