Loan: Are you shopping for a loan? If so, there is an array of factors to take into account during the process, such as types, interest rates, repayment periods, credit scores, etc.
The most important thing for borrowers is to be sure their income is high enough to pay the installments every month without drowning in more debt. In fact, the debt-to-income ratio is vital for banks in the decision-making process.
Follow the tips below to make the right decision.
Table of Contents
Consider the type
When shopping for the best loan, a person has to consider the available types. The first distinction to make is between secured and unsecured personal loans. The former is backed by collateral, referring to the assets used to cover the debt in case the borrower fails to pay for it. Collateralized assets come in the form of a home, vehicle, or other valuable assets. Find out more about the types of collateral.
The borrower is granted a higher sum of money, a longer period of repayment, and more beneficial interest rates. If you somehow default, the moneylender will liquidate the collateralized assets to cover the debt. In order to avoid repossession, you should be certain that you can afford the repayments till the end of the term.
The latter isn’t backed up by any collateral, which is why borrowers are granted limited financing, a shorter period of repayment, and higher interest. Since no assets are used to back up the borrowed amount, the lender faces more risk. Consequently, the credit score of applicants should be solid to qualify.
Another way to categorize loans is by dividing them into open-end and closed-end. The open-end variant, also named revolving credit, can be used to finance all types of purchases, but a minimum amount has to be paid back before a particular date. If this amount isn’t fully paid before the determined date, interest is then charged.
A credit card is a perfect example of the open-end variant, as consumers are capable of making purchases on their cards but still required to pay the outstanding sum by the due date. There are numerous informative sites, such as forbrukslån.no/beste-lån/, helping individuals get the best deals on unsecured loans. Any failure of the consumer to settle the remaining amount would result in charged interest until the date of settling it.
Closed-end loans, on the other hand, are taken out to finance certain types of purchases. Consumers are obliged to pay equal monthly installments over a given time period, which puts them in the category of secured credits. The inability to pay the installment sum means the lender can seize the collateral your provided.
Moreover, debt consolidation loans are suitable for individuals struggling to stay on top of different credits. Such financing enables borrowers to merge all payments into one instead of paying multiple installments and interest rates. Individuals can even reduce the monthly installment amount to eliminate the accumulated debt. Nevertheless, by prolonging the term, the overall interest amount will be increased.
Payday loans are a special form of short-term borrowing, allowing individuals to borrow small sums for several weeks/months. Applicants can submit their applications online and receive their finances in an hour. While this option is convenient when having an emergency, the interest and fees are incredibly high. In some countries, lenders are prohibited from charging borrowers more than twice the sum they have borrowed.
Work on your credit score
Another important tip when shopping for the best loan is working on your credit score. By improving your score, you can qualify for better terms and rates. Nevertheless, the process of building a better credit score takes time. Therefore, if your score isn’t optimal, you should start working on it months in advance.
There are several ways to raise your score over time, such as paying off your revolving debt and paying your bills on time every month. It’s of great importance to reduce the number of creditors and get rid of credit card debt. The bank has to see that your finances are in order as a way to approve your application.
Therefore, debt consolidation is always more than welcome. If you need a principal of NOK 30,000 and your credit debt is already NOK 40,000, you should apply for a NOK 70,000 loan to repay the old debt.
Consider the monthly payments
The monthly installments are of tremendous importance when shopping for a loan. The repayment plan is supposed to comply with your cash flow and income. This plan should be in accordance with your preferences, as some individuals prefer short repayment periods while others long. A short term means higher installments, while a long period enables lower installments.
A significant rule for borrowers to remember is that they shouldn’t pay more than 35 to 43% on debt obligations, regardless of the loan type they choose. Hence, if your salary is NOK 31,000, your debt obligations shouldn’t exceed NOK 13,000. Otherwise, you’re likely to fall behind with the payments.
Debt-to-income ratios are especially important to mortgage lenders, as they tend to deny loans to applicants whose rates are higher than forty-three percent. Debt-to-income ratios that exceed 40% aren’t usually approved, as borrowers will probably struggle with cash flow problems.
Don’t forget the interest
The most crucial aspect of the shopping process is the interest rate of the loan you plan to take out. Banks calculate these rates by conducting an individual assessment of every applicant and paying attention to three essential factors, including credit score, solvency, and loan amount. As discussed before, better scores lead to lower rates.
In addition, low rates are feasible if your solvency is satisfying. Large principals come with higher interest than small principals. If the loan amount is NOK 30,000, an applicant with a low credit score would be offered 18-22% interest compared to 15-18% offered to a person with a medium score and 13-15% to one with a high credit score.
Conversely, if the loan amount is NOK 150,000, a person with a low score would be offered 10-13% interest compared to 8-10% to a candidate with a medium score and 5-8% to a person with a solid score. Applicants should know that the application is non-binding, meaning the offer they receive is valid for a maximum of thirty days.
Consider hiring a lending agent
If this process is too complicated and overwhelming for you to undergo on your own, why not hire a lending agent? These professionals collaborate with a limited number of banks, which give favor to the applications submitted through such agents. Having a lending agent by your side will save you time and provide you with more offers. The offers are likely to come with better terms due to the collaboration between these agents and banks.
Make sure not to rush through the process so as to negotiate the best terms!
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