Are you faced with taking your first loan or was it a long time ago? Then you need to get to know how it works, because it is not free to borrow money. When you take out a loan, you enter into an agreement with a lender, and with that comes certain requirements. You will both have to pay a variety of fees and repay the loan. Here we go over how it works so that you become a conscious borrower.
What does a loan mean?
Borrowing money from a traditional lender, such as a bank, means that you enter into an agreement with the lender. The lender then lends out a sum of money to you, against repaying the loan with interest. Sometimes you are also required to provide collateral for the loan, for example if you borrow money to buy a home. Then the housing itself constitutes security. If you do not repay the mortgage, the lender has the right to sell the home to get the money back. There are also unsecured loans, so the lender only looks at your ability to pay and determines the interest rate accordingly.
How to borrow money?
Today, there are many different approaches to borrowing money. You can either apply directly to different lenders, or to a loan broker. The advantage of turning to a loan broker is then you can compare several loan offers at one and the same time. This way, you can be sure that you are choosing the best offer at the same time as only one credit report is made on you.
What is interest?
The interest rate is the cost you pay to borrow money from the lender. It is a percentage of the loan amount and can be either variable or fixed. If you choose a fixed interest rate, the interest rate (the interest rate expressed as a percentage) will be the same for a certain fixed period. Variable interest rates generally have a lower interest rate. Then the interest rate you pay will vary based on changes in the interest rate market.
In addition to interest, you often need to pay other fees to the lender, such as newspaper fees and setup fees. Review the loan agreement carefully before signing up – where you will find out what fees you will have to pay. It also states whether the lender has the right to raise the fees during the lending period. In the agreement, the lender must also have stated what the loan’s effective interest rate is, that is, the cost of the loan including all fees. The effective interest rate gives a more accurate picture of what the loan will actually cost.