Do you need to borrow money but find it difficult to figure out the loan market? So spend 5 minutes reading Pollyanna’s 10 super good advice when you need to borrow money. We help you understand the different loan types, relevant concepts, and give you advice.
The number of lenders offering consumer loans has also increased in recent years. Therefore, for many people it can quickly become unmanageable to see where to get the best loan. If one is not aware, one may also end up with an overly expensive loan.
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The difference between secured and unsecured loans
You can split loans into two main categories. We have the secured loans, such as mortgage loans, cooperative housing loans and some cases also car loans.
For this type of loan, the lender has security in the form of an asset – for example housing or car. This means that the lender may demand the asset sold if the borrower does not pay off the loan on time.
This means that the risk of the lender not getting his money back is less. Therefore, you typically experience lower interest rates and APR on the secured loans. So if you, for example, own a home and there is free value in it, it will in many cases be the cheapest loan option. However, you must be aware of any costs that may be associated with borrowing in the non-cash value.
But not everyone has the option of a secured loan, as, as I said, it requires that you have an asset that the lender can get security in. But there is an alternative that is unsecured loans.
Unlike the secured loans that require an asset and that money is used for a specific purpose – for example, buying a home or car, it is completely different with the unsecured loans. There is no guarantee for the loan, and you can spend money on just what you want.
It is especially the unsecured loans that can be difficult to find around. They are called something different, even though they are in fact the same.
Unsecured covers, among other things, over overdraft, consumer loans, private loans and quick loans. What typically sets them apart is the loan size and maturity. Mortgages are typically on loan sizes between DKK 1,000 – 15,000 and with short maturities of as much as one month.
Private loans and consumer loans are typically higher loan amounts, which are between DKK 10,000 – DKK 500,000 and with maturities of between 1 year and 15 years. Where quick loans are typically used for consumption and to cover any overdraft at the end of the month, the purpose is another for consumer loans and private loans. Many people often choose a consumer loan or private if they, for example, have to buy a new car or renovate the home, borrow for a wedding or collect expensive quick loans in one single loan.
If you apply for an unsecured loan, the lender always carries out a thorough credit assessment of you and your personal finances. They need to make sure that you have enough air in the economy to pay off the loan.
As the lender does not have collateral in the form of an asset that they may require sold, if the borrower does not pay off, they in theory also run a greater risk. The only security they have is the credit rating made in connection with the application. Therefore, the interest rate level and the APR are also higher compared to the secured loans.
1 Consider borrowing money
Before you even start applying for a loan, you should always consider whether you need to borrow money. Most people know the feeling of having found something that they just have to own – even if they can’t afford it. If so, it might be a good idea to sleep an extra time on it.
But if you have enough air in the economy to pay off on a loan, it is of course quite fair to include a consumer loan for a holiday, new car or something completely different.
There may also be situations in life where it is necessary to borrow. This can, for example, be for unforeseen expenses in connection with a dental or mechanic bill. Some also choose to borrow money for the renovation or rebuilding of the home, which can be a good investment, as the home gains an increase in value.
2 Make a budget
If you need to borrow money, you must of course control your personal finances. In this way, you minimize the risk of unpleasant surprises. A budget need not be complicated.
The most important thing is that you have control over your monthly income, your fixed expenses and any debt items. When you deduct your income from your expenses, you know what your monthly allowance is. Once you know how much you have available each month, you can quickly find out how much you pay off on a loan.
Also read How to put a budget
Get control of relevant concepts
There are a number of different concepts that you should know about borrowing money. We have gathered the most important here.
Whether you are applying for a consumer loan, private loan or quick loan through one of the many online lenders, you should know the following terms:
- Loan Amount: The desired amount you want to borrow
- Maturity: Number of months or years you want to settle the debt over
- Monthly benefit: The amount you pay each month
- Interest rate: The price to borrow money
- Establishment costs: Costs associated with establishing the loan
- Administration fee: A monthly fee paid to the lender
- APR: The annual percentage rate of charge is a description of the total cost, interest and fees accruing on a one-year loan – expressed as a percentage
- Total Amount: The amount you end up paying when the loan is repaid
There are especially two of the above concepts you should be aware of. YEAR and the total amount you end up paying back. Many can quickly be lured by a cheap interest rate and therefore forget to look at the AOP, which also includes all the other expenses associated with the loan.