How does paying off debt to the bank work?
The total nominal income of the domestic economy is equal to nominal GDP growth. This chart shows nominal GDP growth for the U.S.: link to FRED graph.
If you dig into the numbers, we see that nominal GDP growth is often higher than most interest rates. So total income is growing faster than interest costs.
You cannot look at one loan in isolation and hope to make sense of total flows of income. At any given time, new loans are continuously made, while old loans are paid down. Mortgages are typically the largest household sector debt in aggregate. New buyers get large mortgages, while existing homeowners slowly pay down debt. The net change is normally positive, which effectively finances construction. Construction in turn adds to GDP and hence incomes. This story is repeated in different forms across all types of debt.