Finances, and loans in particular, are a subject a bit difficult to broach in most scenarios. I know I certainly don’t enjoy sitting down with my partner or my parents to discuss debt with them, and I’m sure I’m far from the only one who feels that way about it. Unfortunately, this discomfort doesn’t really change the fact that often, these are conversations that need to be had.
Because of that, I think it’s important that we stay as educated as we can about this sort of stuff. News about developments in economics isn’t something that most people are watching obsessively (and I’m certainly not suggesting that you should), but taking a look every once in a while certainly doesn’t hurt.
If you’re out of the loop when it comes to consumer and personal loans, though, don’t worry. Today, I’ll be covering some of the key details to know, as well as explaining what about them has changed in the past few years. While it might sound odd, there actually have been some interesting developments!
What Sets Consumer Loans apart?
As far as the differences between they types of loans that are out there, the key feature of these is pretty self-explanatory. With that being said, though, what you should know is that they are intended for personal use. Basically, an individual or a small group borrows money from a lender for any of a myriad of reasons, but it cannot be used for businesses.
After all, there are special credit agreements geared towards businesses, so that’s what really makes consumer ones different. Given how big of a distinction this is, though, it’s important to understand it. Now that that’s out of the way, though, we can turn our attention to something a bit more interesting.
Fast Facts about Consumer Loans
There are some key features of them to be aware of. The biggest thing is probably the fact that they tend to come with relatively high-interest rates. You can read more about why exactly that is here, forbrukslånguide.com/, since there’s too much to cover for me alone. Either way, it’s worth paying attention to the interest rates, since they’re going to be a pretty big deal for you as the consumer.
Obviously, when you borrow money, you have to pay that principal (initial) amount back to the lender. However, the additional fees that they charge you come in the form of interest rates. That’s more money that you’ll end up paying in the long term and can significantly impact the amount of your monthly bills.
For most, this is probably pretty obvious, but it’s a big deal to pay attention to this stuff. When you’re sorting out your initial contract with your lender, definitely make sure that you read it over several times and fully understand what the terms of the loan are. Compound and simple interest are quite different, as just one example of what to watch for, and it can have some pretty big impacts on what the overall cost of the loan will be.
Maybe you’re wondering why there’s such a steep cost for personal loans, and I can certainly understand why. It does seem odd that a mortgage or an auto loan might have a smaller interest rate than a small, personal one, right? As it happens, though, there’s a perfectly reasonable explanation for this apparent discrepancy.
It comes down to the fact that with these ones, there isn’t collateral. For mortgages and auto loans, in contrast, the car or the house is the collateral if you end up defaulting on your payments. Personal loans just don’t have that, unless you’re going to a pawn shop or something like that.
Lacking collateral means that these style of credit agreements are inherently riskier for the lenders involved. How do they compensate for that? Simple – they charge their lenders higher interest.
When are they Worth it?
Borrowing money is an uphill battle, that’s for sure. Typically, it’s not exactly a good idea to just get yourself in a bunch of debt for a little-to-no reason. This does beg the question, though: when is it appropriate to take out a personal loan?
To be quite honest, though, that’s kind of a hard question to tackle. Given all the factors that could be at play in a person’s life, I can’t exactly tell you what is a wise choice versus what isn’t. For example, personally, I would not want to get a personal loan for my wedding. I’ve got a plan envisioned that just wouldn’t make such a thing necessary. However, there are tons of people who do just that and are able to make their repayments just fine – heck, it even gives them a boost to their credit score in the process.
Do you see what I mean, though? It’s just such a complex and subjective subject that I can’t put a pin in exactly when it’s a good idea. That being said, there are a few situations in which it’s not really going to work. Buying a home is definitely one of them.
Most likely, you’re not going to find anyone who is going around and trying to buy properties with personal loans. The inflated interest rates alone don’t make it worth it, even if you don’t have the collateral involved. On top of that, though, it’s seriously unlikely that you’d be approved for the huge amount of money that you’d need for a home via a personal loan.
Outside of that, though, there’s not a whole lot of situations in which I would say it’s never going to be worth it. That’s something so subjective to each of us, you’ll have to sort it out for yourself. What all could you potentially spend the cash on, then?
Before I get into it, it’s worth noting that you should probably tell your lender at least some of what you’re intending to use the funds in your application. Anyway, though, the possibilities here are nearly endless. For instance, you could get a personal loan to help pay for a vacation for yourself and your family.
However, you could also decide to consolidate your past debts and combine them all into one monthly payment in a loan that charges less interest than the other ones. Yet another option is to build up your credit with smaller micro-loans so that you’ll have an easier time later on in life when you’re trying to get a mortgage or an auto loan!
This is far from a comprehensive list of options, of course, but hopefully, it helps you get the gist of what I’m talking about here. You’ll have to be the one to decide what you want to do, and whether or not your particular expenses justify having the monthly payments and high-interest rates added to your docket.
Something that might help you there is to start formulating a potential budget as soon as you can. Talk with your lender or use some of the online tools that we have at our disposal to predict what your new monthly bills might look like if you make this sort of credit agreement. Decide whether or not you feasibly handle that added expense – and whether you really want that additional responsibility.
Once you’re confident that it’s something that you can handle, though, you can go ahead and move forward with the application process. It can be a long and difficult road to get approved, so I wish you luck!