How exactly does this work?
 

http://best-loan-site.blogspot.com/

What does that do? I know somehow it boosts his rankings somewhere or he wouldn't be doing it, but how does it work?

I don't know if it still holds true, but Google used to treat a subdomain as a more of a stand-alone site. If you promote it, it gains PR seperately from the main site and can get higher rankings, depending on optimization.

Basically, if you had a site with a lot of unrelated subjects, rather than putting those into subdirectories, you would use sub-domains so you could segregate backlinks and get seperate PR and rankings. This way you wouldn't "dilute" your ranking/PR scores because of all the unrelated content.

Something like that - I need more coffee.