Unless you happen to be obscenely wealthy and can afford to take a vacation or buy a car out of pocket, chances are pretty high that you’re eventually going to need to take out a loan for something. This can be anything from securing funds for a small business to borrowing for a house or tuition. The unfortunate truth is that working hard and aggressively saving simply isn’t enough to get by in the world anymore.
For some necessities, you’re almost required to borrow money from a lending agency, usually a bank. Unless you’re fortunate, you can’t go to school or buy a house without borrowing money to do it.
Whether you like it or not, debt is simply one of those things that make the modern economy tick, and you’re faced with the choice to either take on some of it or lose out on some of the most basic elements of the American dream.
But what exactly does that mean? What does borrowing money entail? Even though over half of people have taken out a loan at some point in their lives, there’s a shocking lack of financial literacy surrounding how they function. Basic theories may be taught in school.
Still, until there are dedicated classes for personal finance, this is something that most people graduate without fully understanding – a dangerous and daunting prospect for people on the cusp of taking on mountainous student debt to go to college. This guide will go over the basics behind borrowing money, as well as discuss one of the most common kinds of debt.
What is a Loan?
At the absolute foundation of the definition, a loan is a sum of money borrowed that is paid back over time with interest. The interest rate is the key, as it separates loans from any other kind of debt.
While interest may be one of the most understood aspects of borrowing money, this guide assumes that you’ve never heard of it. The initial amount of money you spend is the principal debt. This is the money you need to accomplish whatever you’re trying to do.
Let’s say you want to buy a car for $20,000, and a lender agrees to lend to you with a 5% rate paid over five years. Over that period, you’ll end up paying the principal sum plus 5% of it, totaling $21,000.
Interest rates come in two varieties. The first is a flat rate, which is the simpler and more common of the two. You can expect a flat rate to remain constant throughout the repayment period of the debt, never changing from its initial value despite whatever is happening in the rest of the market.
In the above example, that 10% will remain 10% forever and can’t be changed by the lender. In contrast, a variable rate is one that does change with the pitch and fall of the overall market. This type of debt is more common with mortgages and tuition than other kinds.
The Joys of Personal Consumer Loans
To illustrate how this works in practice, we’ll look at one of the most common and versatile kinds of debt: a PCL or personal consumer loan. Unlike a more structured affair such as a mortgage or auto loan, PCLs can be used for anything under the sun.
They’re a popular choice for financing that dream vacation or blowout wedding you’ve always wanted, both of which can run your thousands or even tens of thousands of dollars. Now, one could argue that those are luxuries not worth taking out money for, but what about home renovation or expensive repairs?
You can find a list of the most common reasons people take out a PCL at https://www.billigeforbrukslån.no/. However, it’s important to keep in mind that PCLs often come with their own considerations that must be accounted for.
For example, interest rates on a PCL tend to be higher than on other kinds of loans. This is due to both their flexibility and the lack of security for the lender. Some loans carry collateral or a tangible asset that the lender can take possession of in the event of default. PCLs almost universally lack collateral, making it riskier for the bank or lender, as there’s no way to recover the lost money if it isn’t paid back.
For this reason, PCLs also tend to require higher credit scores than other loans might. A high credit score is supposed to indicate a good repayment history from the borrower, which makes them attractive to lenders and more likely to receive approval for a PCL. A PCL might just be what you need to make your dream project come to life if you can meet the requirements.