Home Finance Three Types of Forbrukslån and What They Mean for You

Three Types of Forbrukslån and What They Mean for You

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You’re finally ready! It’s time to take that next big step. Maybe you’re getting a new car, or maybe you’re gearing up to go to college or buy a house. That next step is waiting for you, and you’ve come a long way to get to that point. You’ve even saved up some money to put towards it! That’s fantastic, and you should be proud of yourself. However, as I’m sure you’ve become keenly aware, your own savings aren’t going to be enough, not unless you’re one of the few obscenely wealthy people who can casually buy a house, car, or education out of pocket. For the rest of us, we’re pretty much stuck with the only real option for getting our hands on the money we need: loans. 

Unfortunately, financial literacy isn’t exactly rampant these days. While experts estimate that over half of everyone in America has taken out a loan in their lifetimes, the sad truth is that most people don’t understand the intricacies of how they work – and that includes a lot of people that borrowed money in that statistic. A combination of financial illiteracy, desperation, and predatory lending led to several of the high profile crashes over the past two decades. This guide is here to give you the resources you need to understand the things all loans have in common, as well as give you examples of how those elements apply to the most common ways to borrow money. 

The Common Elements

We begin with what all loans have in common, as this is a good foundation to build an understanding from. You may already know these details, in which case you’re already ahead of the curve, but for those who aren’t familiar with the basics, this section is for you. All loans, at least the ones you’ll get from a bank or other lender, will come with interest. Interest is an extra amount of money you pay back on top of what you borrowed spread out over the repayment period. For example, if you borrow $10,000 at 10% interest, you’ll end up paying $11,000: the initial amount plus 10% of that amount as interest. There are two varieties of interest: a fixed rate and a variable rate. Fixed rates remain the same through the life of the loan, while variable rates change in relation to the wider market. 

The second major distinction that loans have are collateral. Not all loans carry collateral, but many of the most popular kinds do, and it’s usually whatever you’re borrowing money for in the first place. For something to be collateral, it must be an asset that can be seized by the lender if you don’t meet your repayment obligations. For example, borrowing for a car will have the car as collateral, and a mortgage leverages the house in the same way. This is called a secured debt because the collateral acts as a failsafe, minimizing the risk to the lender. Conversely, unsecured loans don’t carry any collateral, which makes them riskier for the lender to give out. This usually means a higher interest rate for the borrower to make up for the extra risk of default, as higher interest rates mean higher payments over time. Most loans that don’t involve a specific thing being bought, such as a home or automobile, are unsecured, as it’s often difficult to negotiate for collateral. 

Student Debt is Predatory

One of the most common kinds of debt in America is the oft-debated student loan. This kind of debt is overshadowed only by mortgage debt, which is understandable given that people need homes to survive. The cost of tuition has risen out of control, reaching upwards of tens of thousands of dollars each year for a student to get an education. This rise in tuition cost began when the federal government started backing each loan, guaranteeing that the lender is going to get paid back regardless of whether the student defaults. Given that student debt is the only kind of debt that can never be discharged through bankruptcy, taking out one of these loans shackles you to it for the rest of your life. That shouldn’t be a problem if you can pay back the debt, but that has become increasingly difficult to the point of impossibility for most borrowers.

Setting aside the issue of stagnant wages and a job market that cannot meet the needs of the average worker, interest rates on student loans are so high that even those that pay regularly on them see their balance only increase, as you can see here. The average borrower can make payments, but the amount they owe increases instead of decreases regardless of that payment, rendering otherwise responsible borrowers incapable of ever getting out from under the burden. This phenomenon is called balloon debt, and is increasingly making student debt a financial crisis. 

The Versatility of a PCL

Hva er et forbrukslån? That’s an excellent question, and the answer is an exciting one. A personal consumer loan, sometimes abbreviated to PCL, is a generalized loan that a borrower can take out for any need they have that doesn’t fall under any other traditional borrowing. Cars, tuition, and homes all have specific kinds of contracts and terms, but a PCL doesn’t. It’s a catch all for anything else you need. Weddings and vacations are the two most common reasons people borrow under PCL, but home projects are also popular. This type of debt is subject to a few extra strings, however; the generalization that gives a PCL its versatility is also what makes it a more difficult way to borrow. 

Lenders will almost always demand a higher interest rate on a PCL than other kinds of borrowing. This is because they’re almost always unsecured, which carries more risk to the banks. Likewise, you should expect a longer repayment period than usual, as the bank will want to get as much money out of you as possible. However, refinancing and renegotiating are easier with PCL than any other kind of debt. Given that there’s no collateral, lenders are generally more willing to find ways to work with you to repay the debt. 

Mortgages: The Death Contract 

It’s a common anecdote in the financial world that the word ‘mortgage’ translates into ‘contract that lasts until death’, because French is a beautiful language. As the only kind of debt that overshadows student loans, mortgages make up the most commonly borrowed money in America. Fortunately, they differ from borrowing for tuition in that they’re both more stable and easier to stay on top of. Housing is one of the most basic needs we all have, and most people won’t ever get the chance to own a home without a mortgage. However, there are some serious considerations that need to be made when considering one, as the terms of the contract are often daunting unless you know exactly what you’re getting into. 

It should be obvious to the savvy reader that mortgages are, by definition, secured debt. The house is on the line, and the bank will happily take it if you fail to meet your repayment obligations. They could sell it off and enter a new mortgage with someone else, and they’d be just fine. Interest rates are usually a combination of fixed and variable, starting as the former and becoming the latter after a few years. The amount of money involved with a mortgage is staggering, which is why several government agencies have opened up ways for certain borrowers to meet requirements through non-traditional means, allowing more people to qualify where the otherwise wouldn’t. These programs are usually reserved for first time borrowers or those who have suboptimal credit scores, people who need the help most. 

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