Loans make the world work. The entire economy is based on who owes who money, and that’s why every country is undergoing debt. It might seem weird to you when you find out that literally every country in the world owes money. Well, who do they owe it to?
It’s not like we borrowed money from aliens, or another planet, so how is it possible that money moves in such a weird manner. It all has to do with how the financial system is structured. People borrow money now, so they can use it immediately, and pay it off later in the years to come. Countries do the same things.
Here’s a simple example. An accident happened on a bridge that destroyed the foundation and there’s a high risk of it falling and being a danger to society. Instead of letting it be and closing it down, the government issues out a loan to fix it immediately, and offers to repay the money over the course of several years. Other governments, massive companies, or banks can finance the loan, and the bridge gets fixed, while the benefactor receives interest.
The same scenario happens in our daily lives. You need to pay for a wedding, a new car, a course to upskill yourself, or get a mortgage. If you don’t have cash on hand, the logical choice is to get a loan now, and pay it off later. Such personal loans get divided into two categories: secured and unsecured, and we’ll go deep into what you should know about them.
Explaining the Basics
Getting extra money from the bank or another financial institution, on the premise that you need to pay it back, plus a little more is called a loan. You can use it to buy household appliances, gadgets, or anything you desire. The criteria for getting a personal loan vary from institution to institution. The main premise is that you need to be at least 21, and have a stable job to qualify.
Currently, the finance sector has evolved, and you don’t even need to go to the bank to get a loan. You can go online, submit an application, and take a few pictures of the papers to get approved. This eliminates the need of you wasting time to physically go to a location. Additionally, you can secure the extra money in the form of revolving credit or a fixed loan, which provide you with the flexibility to use the money however you see fit.
The loan that most people are familiar with is a mortgage. It’s often connected to purchasing a new home. This kind of loan is provided by financial institutions depending on your credit score and the capacity to make a down payment. The rate revolves around 4.5 to 6 percent. Which means, if you need to borrow $100.000, you’ll need to repay anywhere between $104.500 or $106.000, plus the fees associated with it.
Credit cards are the next item on the list. They’re the most common form of personal financing today. You go to a bank and they issue out a credit line to make purchases on a day-to-day basis. Everyone’s familiar with the green zone, where you spend the money you have in the account. But there’s also a red zone, where you go below zero and see the minus sign before the main numbers.
Because you’re getting extra money momentarily with lån på dagen, the interest fees are steep as a consequence. And there are varying degrees of penalties for avoiding to pay off the debt. Compared to a mortgage, credit card rates range anywhere from 16% to 20%, which is close to five times more.
Getting a new car is often associated with getting a loan. You can lease it, or purchase it. In the first case, you’re using it while the ownership stays at the car company. In the second case, the vehicle is completely yours. The loan however, can be obtained from a financial institution, or the dealership where you plan to purchase it from.
A great education is priceless, because it sets you up for success later in life. If you plan to self-educate, it can be free. But most people choose to go to college, or a trade school which costs a lot of money. Students have no money, which is where student loans come into place. They cover educational expenses that are associated with attending college and paying for tuition fees. This enables you to continue learning and repay after you get a job.
Refinancing is the process where you get a new loan to repay an old one. It’s a pretty common scenario which helps you change the terms of a previous deal. Let’s say you’ve got a mortgage with a 6% rate and you repay it for five years. During that time, your credit score improves, and you can get the same deal, with a 4.5% rate. It’s an easy switch that saves you money over the long term.
Finally, there are personal loans that get tailored to your immediate need and can be used for a variety of acquisition. You have the freedom to pursue any financial goal. You can start a business, do renovation work around the house, go on a holiday, plan a wedding, or finance a funeral. All of these scenarios are emergencies, which is where personal loans come to the rescue.
How Do You Get a Loan?
Before processing a personal loan, it’s essential to have a prior understanding of the documents you’ll need. First of all, you need an identification. That can be an ID, a driver’s license, a certificate of citizenship, or a birth certificate.
Next comes your residence. Lease agreements, or anything that has your address printed on it counts. Bank statements, tax returns, and paychecks serve as income verification that tell the financial institution whether you’ll be able to pay the rate every month.
Last but not least, there are additional documents such as evidence for another source of income, rent and mortgage payments, or statements from previous loans.