Loans in finance mean lending money to borrowers by an individual, entity, or organization. Essentially, the recipient of the loan then incurs a debt and this is usually at an interest. Before a loan is given out, both the lender and the borrower will reach an agreement or sign a contract.
The agreement usually will stipulate the terms of the contract such as the amount borrowed and the interest rate to be charged. It will include the length of time for the money to be repaid. It may also include the expected monthly repayment and interests. Charging an interest provides the lender with an incentive to give out the loan.
The money is then expected to be paid back monthly alongside the interest. This is until such a time that was agreed that the money and the interest will be fully repaid. A common example of this is consumer loans.
Consumer loans, which are most times simply known as loans, are those types of credit facilities given to consumers so that they can finance specific expenditures. These types of loans are typically given out by lenders and creditors and they are often unsecured.
That is, they do not require collateral where they are backed by the borrower’s assets. All of these loans comes with different terms as well as conditions.
There are different types of forbrukslån (consumer loans) available. A consumer can get a loan for almost anything that they want to buy. These types of loans vary based on their purpose, their interest rates as well as the repayment period.
Borrowers often take these loans to finance things such as living expenses, education, buying a car, etc. They may also be used for growing a business. Asides from using it for purchasing things, a lot of people also use consumer loans to pay off other smaller loans. Examples of the latter include credit card loans.
How Do Consumer Loans Work?
Consumer loans are best for times when you need money to buy something but you do not have the funds. It may be that you cannot afford to fully pay for it at a go and a monthly installment is more convenient.
To get one, you have to reach out and apply to a lender or creditor which is most times a bank. Some other financial institutions and lenders offer this service too.
After you have applied, the lender does a credit check to ascertain your creditworthiness and that you have no payment remarks. For this, you have to provide them with every one of your financial commitments. They also want to know what you intend to use the money for.
The amount of money you will be able to borrow will depend on your financial standing. It is recommended that you do not borrow more money than you can repay per time. The creditor may also put a limit on how much you are able to borrow based on your situation.
When the loan is approved, you will receive the approved funds as a lump sum. This is referred to as the principal. Based on the agreed interest rate, you are expected to pay back monthly payments until you have paid off the loan. The interest you pay will be dependent on factors such as:
- The amount you are borrowing.
- The prevalent interest rate
- The length of time required for you to pay back the loan (typically known as the loan term).
Keep in mind that the lender may charge you a fee for lending you the loan. The monthly payment will include part of the principal and the interest accrued for that month.
Understanding Interest Rates
As you do not need to have collateral or security to get a consumer loan, the risk to the lender is high. Due to this, these loans often come with high interest rates than other forms of loans. The interest rate can be as high as 30%. However, you can find some that are less than this.
When looking to get a loan, it is best to find one with a low interest rate. You should also keep in mind that the period for repayment is equally important. All of these will determine what the cost will be to you.
The total cost of the loan is dependent on the effective and nominal interest rates. It is crucial that you understand the difference between the two. The nominal interest rate is the quoted interest rate for the loan without including fees or any other charges.
On the other hand, the effective or real rate reflects the actual rate you will be paying for the loan. This includes the fees. In some climes, it is referred to as Annual percentage Rate (APR). It takes into account fees such as those to originate and service the loan, early repayment fees and so on. You can read about effective and nominal interest rates here.
When a borrower takes a small loan, there is a difference between the effective and nominal rates. This is because fees make up a large percent of the cost. However, for a bigger loan, fees tend to be smaller relative to the interest rate.
Also, the term of the loan is one factor that affects its costs. This is the time it takes for the borrower to repay it.
Finding Low Interest Consumers Loan
To get a low-interest loan, start by checking out offers from various lenders. You can apply to as many lenders as possible so that you get different offers. Some will always be cheaper than others even if it is a small difference.
You do not have to apply to these various banks by yourself. It is wise to use an agent and this service is free without any obligations attached to it. With this, you may be able to get up to 15 or more low interest loan offers. You can then compare the offers before choosing the best one.
The rate you get will be determined by the creditor when your application is assessed. This is why it is often important to have a high credit score. If you do, the interest rate you get will be lower than when you have low credit scores.
You may be able to influence the interest rate given to you by the bank. One way as mentioned above is through getting as many offers as possible. Another way to get lower rates is to have a co-borrower or co-applicant apply for the loan with you. This can be your spouse or partner.
Both of you will be responsible for repaying the money and this gives you greater credibility. By doing this, you stand a higher chance of getting the loan approved. Also, you can even qualify to get a higher amount of money.
Note however that when you are borrowing with someone, you have the same responsibility for paying back the lender. If one of the two parties does not pay, the other will also be held liable even if they are not at fault. It is therefore important to borrow with a trustworthy and reliable partner.
Furthermore, if you are looking to get a lower interest rate, you might consider borrowing a secured loan instead. They are typically lower than unsecured ones and are easier to get.
Loans are great tools for financing and meeting your everyday needs. They come in different variants and one of these is consumer loans. These type of loans are often unsecured and does not require you to back them up with your assets. For this reason, they typically come with high interests.
Nevertheless, you can find ways around this and get them at lower interest rates. You can start by applying through an agent and getting several offers that you can then compare.