Credit agreements make the world go ‘round, at least to some extent. It’s hardly a contentious statement, all things considered, but it can be somewhat frustrating for us as consumers. After all, being able to borrow money and obtain loans isn’t always an easy task. There are some significant roadblocks in the way for a lot of us out there.
Today, we’d like to discuss the steps that you can take to ease that process along, though, if it’s something that you’re worried about. There’s a lot to unpack when it comes to loans, that’s for sure. We’ll do our best to walk you through all of it, starting with the basics of borrowing, lending, and how we can qualify.
From there, we’ll make sure to explain what loan calculators are and how we can best utilize them. At the end of the day, the goal is to make sure that we can get the best deal possible. Let’s just say that this is easier said than done, so stick around to learn more about the overall process!
Understanding Loans: What are they, and how do they work?
Naturally, our first order of business is to explore what loans are and how they work for us as borrowers. Put simply, loans are financial arrangements (credit agreements) where a lender provides a borrower with a specific amount of money. This is pre-established in a contract that both parties agree upon beforehand.
Contracts like this will also include the specifics on how the principal amount must be repaid over time, factoring in interest rates. We’ll explain those further shortly, but for now, just know that there are two main types that most lenders tend to work with.
Once the borrower agrees to the terms and conditions established in the contract, including the repayment schedule and any applicable fees, then the money will be disbursed. Depending on what you’ve worked out with your lender, this could work differently, but a lot of the time it will go directly to a bank account.
What Can We Use Them For?
As you may already know just from clicking on this article, loans are quite versatile. They can be used for just about anything, really – especially when we take into account that there are specialized credit agreements for a ton of purposes. Perhaps the most obvious ones in that department are auto loans, although mortgages are a close second.
The big picture that we’re trying to show here is that there are all sorts of possibilities when it comes to how we use our loans. Although not particularly relevant here in Norway, across a lot of countries, students can use them to help pay for college or university. Certainly, it’s something to consider if you plan on studying abroad.
Beyond that, though, there are practical, everyday reasons that people borrow money too. You can click here to get an idea of how that works and what the purposes can be, but we’ll explain some examples as well. One that comes to mind for many of us is wedding planning, since that can be such a huge endeavor.
It takes a lot of money to plan a wedding, or a vacation, so some borrowers do apply for personal loans to accomplish those goals. While it is easy to write off those things as superfluous or unnecessary, as long as we as borrowers are taking out loans responsibly, then there’s really nothing wrong with it. The key is that “responsible” bit, though.
Applying For a Loan
Now that we’ve covered the basics of what they are, you’re probably wondering how the application process works. It’s an understandable concern given how complicated things can be these days. Thankfully, there are a lot of ways that we can apply now.
The most “traditional” option is to fill out a pen-and-paper application. Of course, this is a bit of a tedious method, which is probably why most folks have started to gravitate away from it. Nowadays, it’s much easier to go the virtual route and apply online. In fact, there are some lenders who will let you apply through text messages.
Qualifying for a Loan
The next issue at hand is the matter of actually qualifying for credit agreements. This may look different based on where you live as well as what the purpose behind the loan will be. With that said, we’ll be explaining several of the factors that can influence a lender’s decision both here in Norway and abroad.
Current Income and Employment Status
One of the first things that lenders tend to ask on applications is what your income is right now, as well as whether or not you are employed. While at first glance this may seem like it is somewhat invasive in terms of privacy, hopefully it makes sense from the perspective of them needing to ensure that they get their money back. Their goal in asking is to ensure that you have the means to do so.
As you can see by looking at articles like this one, https://www.jstor.org/stable/1991095, one of the other biggest factors that goes into a person’s approval odds is how high (or low) their credit score is. If you weren’t already aware of this, credit scores are a metric that the major credit bureaus across the world utilize.
They track things like how often you pay your bills on time, especially related to any current credit agreements that you’ve got. So, if you have a credit card for instance, they track when you pay on time as well as when you’re late. The higher your score, the better chance you have to qualify for loans with better terms.
Another metric that they tend to use is often known as debt-to-income ratio. For anyone who isn’t familiar with that, it’s just the comparison of how much debt you’ve got currently and how much money you’re making at work. Ideally, you’ll have far more monthly income than you need to pay off current debt, which will boost your chances of approval.
Whether or Not You are Using Collateral
The final one we’ll touch on today is this: the matter of collateral. For anyone who didn’t already know, collateral in the context of lending refers to an asset that a borrower pledges to a lender as security for a loan. An example of this is a mortgage, where the property itself serves as the collateral.
We can think of it as a form of protection for the lender in case the borrower fails to repay the loan. So, if the borrower ends up defaulting, the lender has the right to seize and sell the collateral to recover their funds. A bit harsh, certainly, but it does keep them protected from losing anything if the borrower can’t pay the principal amount back.
What’s the Importance of Loan Calculators, then?
The big question here is of course still this one: what’s the deal with calculators, and is there a reason that we should be using them? We’ve got the answers for you, don’t worry – just stay tuned.
For the most part, a loan calculator serves as a way for us as consumers to get an estimate of how much we’ll be paying in interest on a given credit agreement. Remember how we mentioned interest rates earlier, and said that we’d be covering them later? Well, this is later.
Simple interest rates aren’t overly complex, as you may have already guessed. Interest rates are the way that lenders charge us for being able to borrow in the first place, as some context. The simple method is quite straightforward and is when the calculation is done using only the principal amount. It tends to cost us as a consumer less over long periods of time, and the formula is as follows: principal times rate times time of the loan.
In contrast, compound interest will end up costing us more in the long term. However, it’s what most lenders use since it increases their own revenue. Additionally, since there are a few different sub-types of compound interest, there’s not really a universal formula to calculate it.
Instead, it can depend on which lender you’re working with. This is where a loan calculator can really come in handy, of course. They can do the hard work for you, in this sense –once you’ve got an idea of where you want to borrow from, the engines on these calculators can find the typical interest rates that they charge for you.
Essentially, this gives us an idea of what we can expect to be paying throughout the length of the credit agreement. Since there’s a lot of moving parts that can impact interest and monthly payments, trying to do those calculations on our own isn’t easy. So, why not utilize the tools that we have in front of us, right?
On a final note for today, we’d like to emphasize the importance of borrowing responsibly. While it can be quite tempting to take out a loan whenever we need cash in a pinch, this isn’t sustainable in the long term. Make sure that you only apply for credit agreements that you know you can reasonably afford.
By “reasonably,” we mean being able to make monthly repayments without having to put significant strain on ourselves financially speaking. If you have to reduce your current standard of living to afford a loan, for instance, then it’s probably not worthwhile. Just exercise caution throughout this process, and never hesitate to ask questions along the way.