These days, most of us are well aware that in order to pursue a lot of things in life, we will probably need to borrow money at one point or another. In fact, trying to make large purchases without having prior credit history is incredibly challenging. That’s just part of why it can be valuable to learn about small consumer loans.
Of course, there are plenty of other reasons as well, which we’ll be sure to cover in great detail here today. If you’re looking for some additional information, or background knowledge prior to starting here, make sure you check out this page: forbrukslån no/ in order to get a primer! With that said, let’s get started.
The Basics of Loans and Lending
In order to get a sense for small consumer loans, it’s important to understand the basics of these concepts. While a lot of us assume we already know most that there is to know about credit agreements like this, you may be surprised by how much you weren’t already aware of! That’s why we’re here, though, so make sure to stick around.
Defining Loans
Naturally, our first order of business is to define what loans are. There are a few definitions, but for simplicity’s sake, we’ll be using the following: a loan is a sum of money that a lender gives to a borrower with the expectation that it will be repaid in full, typically with interest, within a specified period of time.
Keep those important terms in mind, such as “interest” – we’ll be covering them in further detail in this section as well. In order to truly understand what’s going on with these sorts of credit agreements, dissecting them is the best way to tackle them.
Principal
Simply put, the principal is the initial amount of money borrowed from the lender. This is the amount that the borrower agrees to repay to the lender. The principal for a particular loan will vary – for the ones we’re talking about today, it will typically be less than 500,000 NOK. Just keep in mind that it may be different depending on your particular circumstances.
Term
The term of a loan refers to the period of time during which the borrower is expected to repay the loan in full. These terms can vary from a few months to several years, depending on the type of credit agreement that you have. When you’re applying for one, make sure to check what the term would be so that you can budget correctly for the repayment plan.
Interest
Interest is the additional amount of money that a borrower is required to pay back to the lender on top of the principal amount of the loan. It is typically expressed as a percentage of the principal amount borrowed. With that said, there are a few different types of interest to be aware of.
The two that we see most often in credit agreements are simple interest rates and compound interest rates. The former are based purely on the principal amount, so any time the percentage is calculated, it’s not going to grow. Compound interest rates, on the other hand, are calculated based on the percentage of the principal amount and any interest already accrued.
For that reason, simple interest rates are in the interest of the consumer on loans, but against the consumer’s interest for a savings account. Unfortunately, you likely will end up with a compound interest rate on any credit agreements you have, as this benefits lenders much more.
Collateral
Before we completely delve into this topic, just remember that for small consumer loans, collateral usually isn’t part of the picture. Still, it’s worth covering what this is, as a lot of larger loans (such as mortgages or those for automobiles) will require collateral. This means you’re likely to see them at some point.
In essence, collateral is some form of asset or even a property that a borrower o to the lender as a form of security for the loan. If the circumstance becomes that the borrower is unable to or fails to repay the loan, the lender then has the ability to seize the collateral to cover their losses.For instance, with a mortgage, the property itself serves as the collateral if payments are unable to be made.
Credit Score
We’ve already mentioned this topic a few times thus far, and chances are, you’re already somewhat familiar with credit scores. They’re an incredibly important part of lending, as credit scores are often what lenders use as a gauge in determining how credit-worthy a potential borrower is. Still, what are they at their core?
Taking a closer look, a credit score is a numerical representation of a borrower’s creditworthiness, based on their credit history and financial behavior. As we mentioned, lenders utilizethese scores to determine the risk of lending money to a borrower and to set the terms of the loan.
Of course, they’re impacted by several aspects of our lives. Most importantly, when we make payments on time for pre-existing debts, it boosts our scores. When we are late on those payments, our score is lowered.
While this may seem complicated, at its core, it’s really not. If you have a score below five hundred, that’s considered “low” – and anything above seven hundred is considered “high.” This may vary somewhat depending on the bureau that you’re looking at for the score reporting.
Repayment
For our final look into the basics, let’s examine repayment. Repayment is the process of returning the borrowed money to the lender, typically in monthly installments over the course of the loan term. Borrowers are expected to make timely payments to avoid penalties and damage to their credit score.
What are Small Consumer Loans, then?
With the simple stuff conquered, we can turn our attention to some of the specifics here. What are small consumer loans, and what separates them from everything else we’ve discussed?
Small consumer loans are loans typically taken out by individuals for a short period of time to cover unexpected expenses or to make a purchase. These agreements are often smaller in amount compared to traditional loans and are usually repaid within a few weeks to a few months, though that will vary based on your lender and what you need the money for. Small consumer loans can include the following types:
Payday Loans: Payday loans are short-term, high-interest loans that are usually due on the borrower’s next payday. These loans are oftenintended to provide fast cash for borrowers facing some sort of emergency or unexpected expense.Unfortunately, they are considered predatory by many (as you can see here) because of high interest rates that will make the borrower pay much more than the principal amount, even after a few days.
Installment Loans: These are certainly less controversial than our prior entry. Installment loans are small consumer agreements that are paid back over time with a set number of scheduled payments. These loans may have lower interest rates compared to payday loans and are often used for larger expenses, such as home repairs or medical bills, though the latter usually aren’t an issue here in Norway.
Title Loans: Title loans are secured credit agreements in which borrowers use their vehicle title as collateral to borrow money. If the borrower fails to repay the loan, the lender has the right to repossess the vehicle. These aren’t overly common, admittedly.
Cash Advances: Cash advances are short-term loans that are most often offered by credit card companies.When they are approved, borrowers are able to withdraw cash from an ATM or receive a cash advance at a bank or financial institution. Cash advances typically have high fees and interest rates, so keep that in mind.
Consumer Loans: Something to note right off the bat that consumer loans don’t always have to be small – plenty of them come in larger increments as well. The important thing is that they are typically geared towards individuals (or small groups such as a partnership), and they can be used for a wide range of things.
Unlike certain credit agreements that specify what the money disbursed should be used for, personal loans have no such stipulations. This means that they are quite versatile, something that appeals to many borrowers.
Under this umbrella, personal loans are the ones most of us think of. As far as what they are is concerned, they are unsecured loans that can be used for a variety of purposes. This includes things such as home improvement projects, medical expenses, or debt consolidation. These loans typically have fixed interest rates and terms, and the borrower receives the full loan amount upfront and repays it in regular installments over a set period of time.
Are Small Consumer Loans Worth it?
The final thing for us to discuss today is of course this: are these types of credit agreements worth it in the first place? Should we be incurring debt this way, or is it too risky? In truth, it will likely depend on the type of loan that you’re pursuing.
Payday ones typically won’t be worth it, because of the high interest rates that are often incurred. Whatever the length of the term, you’ll likely end up owing far more than you intended.
On the other hand, personal loans from a trusted lender can be a useful tool in several ways. They’re a way to build up a credit score, as making the repayments in a timely manner can be quite useful. Additionally, they can be utilized for important projects like home renovations or even for planning a wedding or taking a vacation – all of which, if the repayment terms are within your means, are a great way to utilize a loan.