Loan
Age 9+Money that someone lends you, which you must pay back — usually with interest.
At a glance
A loan is money another party (usually a bank) lends you, that you must pay back over a fixed period — usually with interest. Loans have three key numbers: the principal (amount borrowed), the interest rate (cost of the loan as a percentage), and the term (how long to pay it back). Understanding those three numbers is enough to evaluate any loan offer you'll ever see.
Example sentence
"A car loan means the bank buys the car and you pay them back over years."
Why this matters for kids
Most big adult purchases — homes, cars, college, sometimes businesses — are financed with loans, which means a meaningful share of adult life is spent paying back borrowed money. The kids who walk into adulthood understanding loan structure don't just get better mortgages; they evaluate every "pay monthly" offer with clearer eyes. Buy-now-pay-later, store financing, the $0-down lease, the 84-month auto loan — all of these are loans dressed up to look like "monthly payments." Kids who recognise the underlying loan and ask the three questions (principal, rate, term) cut through the marketing in seconds. The total cost of a loan is almost always meaningfully larger than the sticker price; how much larger depends on the rate and the term. A car that costs $25,000 with a 6% loan over 6 years actually costs about $29,800 once you finish paying. That gap — $4,800 — is interest, and adults often pay it without noticing.
How to teach it
When you take out a loan (car, mortgage, refinance), pull out the loan documents and walk through them with the kid. Show the principal, the rate, the term, and the total amount you will end up paying once it's done. The gap between the sticker price and the total paid is always bigger than they expect, sometimes shockingly so on a 30-year mortgage. That gap is the cost of borrowing, and seeing it on a parent's real loan makes the abstract concept tangible. For older kids, run the math on hypothetical loans: a $20,000 car at 4% over 5 years vs the same car at 8% over 7 years. Watch the total cost change. Introduce the concept of an amortisation schedule — most loans charge more interest in the early years. That detail matters for understanding mortgages later.
Common misconceptions
- A loan is the same as a credit card. Loans usually have fixed rates, fixed payments, and fixed terms. Credit cards have variable rates, minimum payments, and no end date if you keep using them.
- The monthly payment is the price. The price is the principal; the payment is just how you pay back over time. Kids should learn to evaluate the total cost, not just whether they can afford the monthly.
- All loans are bad. Mortgages, business loans, and (sometimes) student loans buy assets that produce returns. The question is what the loan buys, not whether loans exist.
Related terms
More for parents
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