Loan: the money now, the repayment later
A loan is money you receive with an obligation to repay according to agreed terms.
The principal is the amount borrowed. Interest is part of the cost of credit, and there can be additional fees. Check the total repayments, the loan period, the type of interest and indexation. A smaller monthly payment is not necessarily a cheaper loan.
For illustration only: a loan of 1,000 ₪ for one year at a simple interest rate of 10%, with the entire repayment at the end of the year, requires 1,100 ₪ before additional costs.
Explain the example in your own words and check the calculation.
Bank of Israel · Savings and Investment Products ↗Check your understanding
What is the loan principal?
- The original amount borrowed
- Only the interest
- A gift
Answer and explanation
The original amount borrowed. The principal is the amount you borrowed before interest.
Does a lower monthly repayment always mean a lower total cost?
- Yes
- No
- Only at the bank
Answer and explanation
No. A longer repayment schedule can increase total interest and total repayments.
Continue learning
Leverage: losses grow too — Leverage is increasing exposure using debt or another mechanism.