ELI5: Explain Like I'm 5


Financing is when you need to buy something but you don't have enough money to pay for it all at once. So someone gives you the money to buy it and you promise to pay them back over time.

For example, let's say you want to buy a toy that costs $10 but you only have $2. So you ask someone, let's call them the bank, to give you the remaining $8. The bank agrees to give you the money, but they also say that you have to pay them back every week, for example $2 every week, until you have paid back the whole $8.

This is called a loan and the $8 that the bank gave you is called the principal. Whenever you pay back some of the money you owe, it's called making a payment. So if you pay the bank $2 every week, after 4 weeks you will have paid back the $8 and you will be done with the loan.

Sometimes, the bank will also charge you extra money for letting you borrow their money. This is called interest. So for example, the bank might say that they will give you the $8, but you have to pay back $9 instead of $8. This extra $1 is interest.

Financing is very useful because it lets you buy things that you wouldn't be able to afford otherwise, as long as you are able to make the payments. However, it's important to make sure you understand how much you are borrowing, what the interest rate is, and how much you will have to pay back in total before you agree to a loan.