How loans really work hit me like a ton of bricks a couple years back when I was sitting in my crappy apartment in Austin, Texas, staring at my laptop screen with a half-eaten Whataburger on the desk – grease stains and all – trying to figure out why I was drowning in credit card debt even though I thought I was being “responsible.” Like, seriously, I always figured banks just lent out money that other people deposited, right? Nope. Turns out, how loans really work is way sketchier – banks literally create new money every time they approve a loan. It’s called fractional reserve banking, and nobody at the bank ever straight-up explains this to you. Anyway, let me ramble through my dumb mistakes so you don’t repeat ’em.

How Loans Really Work: The Basic Mind-Blower I Wish Someone Told Me Sooner

Okay, picture this: I needed a car loan back in 2022 ’cause my old Honda finally died on I-35 during rush hour – total nightmare, sweat pouring down, Texas heat blasting. Went to my bank, filled out the forms, and boom, approved. They “lent” me $25k, but here’s the kicker on how loans really work: they didn’t pull that cash from some rich dude’s savings account. Nah, they just typed numbers into my account. Poof – new money created outta thin air.

This is fractional reserve banking in action. Banks only gotta keep a tiny fraction (like 0-10%, depending on regs) of deposits as reserves. The rest? They lend it out, creating more money in the process. Check out this explanation from the Bank of England – yeah, not even US, but same idea: Money creation in the modern economy. They straight-up say banks don’t just intermediate; they create money when lending.

I felt so stupid when I learned this. Like, why didn’t my high school econ teacher mention how loans really work this way? Probably ’cause it’s kinda wild.

How Loans Really Work in My Biggest Screw-Up: That Home Equity Mess

Fast forward to last year – I’m in my current spot in Denver now, snow piling up outside the window as I type this, coffee going cold ’cause I’m ranting. Thought I was smart taking a home equity loan to “invest” in some crypto stuff everyone was hyping. Big mistake. Huge.

See, how loans really work here amplified everything. Bank created that loan money digitally, I spent it, someone else deposited it… and the cycle kept multiplying the money supply. But when crap hit the fan and values tanked, I was stuck paying back real money with interest on something that was basically invented. Felt trapped, honestly. Chains of debt, you know?

Investopedia breaks it down nice and clear: Fractional Reserve Banking. They explain how one deposit can lead to multiple loans, expanding the money supply. My take? It’s genius for the economy but sucks when you’re the one overleveraged.

• Tip from my regret: Always calculate if you can afford the payments if rates spike – mine did, ugh.
• Another: Don’t borrow for speculative BS unless you’re okay losing it.
• Seriously, ask the banker hard questions next time.

I digress, but yeah, that experience was embarrassing. Told my buddies over beers, and they laughed at how naive I was.

Why Banks Never Clearly Explain How Loans Really Work (My Cynical Take)

Banks love the mystery, dude. If everyone knew how loans really work – that most money is debt-based and created by private banks – people might freak out or demand changes. There’s myths everywhere, like banks only lend depositors’ money. Wrong. Khan Academy has a solid video on it: Overview of fractional reserve banking.

Me? I’m contradictory – I get why the system fuels growth (built my house kinda on it), but it also caused my stress migraines. Raw honesty: I still use credit cards, but way smarter now. No more maxing out.

Anyway, Federal Reserve has rules on reserves: Reserve Requirements. But since 2020, it’s often zero – even wilder money creation potential.

Wrapping This Ramble: My Flawed Advice on Navigating How Loans Really Work

Look, I’m no expert – just a regular American who’s been burned and learned the hard way while crunching numbers late at night with Netflix paused. How loans really work is powerful but dangerous if you don’t respect it. My genuine suggestion? Next time you’re eyeing a loan, pause. Read up, calculate worst-case, and maybe chat with a non-bank advisor.