What should you know before considering a forbrukslån?

Are you considering taking out a consumer loan to tide you through difficult times? Find out what you need to know before borrowing money.

In tough financial times, some people rely more heavily on loans to supplement an insufficient income. They might use loans for purchasing big-ticket items, funding holidays, consolidating high-interest debt, or for emergencies. 

Most people choose a consumer loan which is an umbrella to a host of loan products like house lending, auto products, student loans, business loans, plus the ever-popular personal loans, usually without a specific designation. Any of these can be obtained from a traditional banking institution or an NBFC “non-banking financial company.”

In order to get a rimelig lån (reasonable loan) product, the borrower needs to present to the lender an adequate credit profile and financial circumstances deeming them worthy of affordable rates, favorable terms, and the loan amount they’re asking for. 

Loan providers are stringent with the eligibility requirements since the personal loans are unsecured products leaving the lender in the position of risk if the borrower were to default. 

That’s particularly true in the case of business loans when a company falters and ultimately fails, with the leader simply walking away from the repayments. What should you know before attempting to take a consumer loan of any of these kinds? Let’s dive into tips and helpful hints to guide you through the lending process.

What should you know before considering a consumer loan

Regardless of the consumer loan you opt for, each provides individual benefits, and all will involve dire consequences to a credit profile if a default were to occur. 

In order to get a reasonable loan offer with affordable rates and favorable terms, a lender needs to see a positive credit history with repayments of the previous debt that were on time and consistent, plus a good to an excellent score. 

The lower the score and the less favorable the history, the provider will be more likely to attach a higher interest rate to the loan, especially if this is a business loan. As a rule, business loans usually come with lower interest and better terms than most consumer loans unless the borrower can’t meet eligibility for these terms.

In the case of a business or personal loan, when the lender attaches a high rate in order to approve the product, the borrower has the option to provide assets equating to the value of the funds to secure them as collateral to help reduce the rate.

In any event, the priority for all borrowers is to compare lenders before committing to a product since there is a vast range of options to choose from. 

Selecting the best deal can prove daunting, requiring sufficient research on fees, terms, rates, and what works with your personal budget and financial circumstances. Check these tips to help you make a more educated decision.

How much will you need to borrow?

The loan amount is a crucial part of the decision that needs to be determined before shopping for a financial entity. Regardless of whether you’re looking for a personal loan or a business product, you don’t want to take more than what you absolutely need to avoid creating unnecessary debt.

When you determine a fixed amount, you can then work to figure out the EMI or equated monthly installments based on the sum you seek and the loan term you anticipate. 

Each provider will offer a unique product making it necessary to read the agreements carefully, especially the fine print, to weigh the pros and cons.

Interest is one of many considerations to factor. You’ll want to pay attention to fees and charges associated with each option in addition to the interest. One provider might have a few points higher rate, but the terms are much more favorable than the rest. It would be to your benefit to take the higher rate.

What will the repayment term be?

The indication is that borrowers who settle on a shorter repayment term will see a lower interest rate for their loans. While that might be true, you don’t want to agree to a stifling monthly installment simply to get the lowest rate. A short-term will mean higher monthly repayment amounts. 

When establishing a budget, you’ll need to calculate whether the larger sum works comfortably with your other monthly obligations or if it will be too challenging to sustain without possibly missing or delaying payments. The idea is to select a term that works ideally for your specific circumstances.

While everyone would love to become debt-free much sooner rather than later, no one wants to default on payments they can’t afford. Plus, you run the risk of damaging your credit when you get in over your head and ultimately default.

The credit score is a primary deciding factor

In any one of the consumer loan products, loan providers consider the credit score, referencing as “CIBIL,” as a primary deciding factor for eligibility. Before applying, checking this information to gauge where you stand with qualifying is wise. Some lending agencies provide pre-qualification. 

This is something you should take advantage of. The institution will only do a soft credit pull but will provide details on the loan plus let you know whether you’re a good candidate for applicant approval and at what potential rate.

For a personal loan, the indication is that a good credit score in order to get a reasonable loan is 750 allowing for favorable terms. This tells the lender that there will be no difficulty recovering their funds. For a business loan, a credit score needs to be roughly 685 to present as a reasonable risk.

The origination fee

As mentioned earlier, sometimes, when shopping for a loan provider, you’ll have some with a few points higher interest, but you might not realize that the ones with the lower interest are less favorable with their terms. Perhaps, they have substantial fees that you’re not recognizing.

One of those could be an origination fee. Not all lending agencies attach this fee to their personal loan products, but some lenders expect this charge when the application is verified. These are fixed amounts, but you need to learn the rate each lender charges in order to avoid the possibility of an exorbitant cost.

The suggestion is that these can range as high as 8% of the total amount borrowed on the loan. This money is taken from the lump sum before the funds are deposited into your bank account. That means you will receive your requested loan funds minus this charge, not getting the total amount you negotiated.

What is your current debt situation?

When considering a loan, it’s always suggested to redo the household budget to include the estimated monthly installment for the new loan to ensure you won’t be inundated with debt with this additional repayment. 

The debt-to-income ratio is supposed to remain at or below 30%. This ratio is a balance between the income you bring into the household and the debt that goes out.

You want this number to be as low as possible. If your exceeds 45%, it’s recommended that you work on paying down debt before trying for another loan. 

It’s also recommended that you attempt to bring in more income, perhaps trying to raise your salary with your current employer or looking for a side gig to supplement the salary.

Lenders look at this number when qualifying borrowers. If they believe the candidate won’t be able to afford to make the loan’s repayments comfortably, the loan will be rejected. Visit here to learn what would be considered a reasonable amount of debt.

Choose your loan carefully

Many credible lenders are available on the market, and they hope to offer affordable products to borrowers who qualify for the consumer loans. It’s not the lending agencies’ goal to attach incredibly high rates or reject borrowers when there’s an obvious need.

The financial entities are, however, put in a predicament with the stringent guidelines they need to adhere to in order to avoid the potential of being left with defaulted loans.

Borrowers can relieve the situation by finding loan providers that offer pre-qualification to check their criteria and eligibility ahead of applying so they can make improvements or corrections. 

This allows a minimal chance for a rejection and every opportunity for there to be a reasonable loan offer. More borrowers need to take the preliminary steps to save a plethora of complications for themselves and everyone involved in the consumer loan process. 

Photo by Karolina Grabowska