Lån 101: Introduction to Borrowing

If an individual is a current or future university or college student, there is a good chance that they are considering student loans. Before making a huge decision, it pays to know and understand the basic idea behindlending and borrowing. All mortgages consist of three primary components: The term, security component, and interest rate (IR).

Interest rate

These are financial institutions’ charges for the use of their funds. The IR is usually a small part of the amount loaned. There are two types of IRs: variable or adjustable and fixed. Fixed rates are just what the name suggests: unchanging and fixed. If people fixed IR is seven percent, it would be seven percent for the remainder of the loan’s life.

Variable rates (VR) can usually change and are based on standard market rates, like prime IR (the lowest premium of interest banks can provide at any place and time offered to borrowers). For example, people may take out loans with VR at prime plus two. It means that people will pay 2% more than the PR or prime rate, no matter what it is. IRs for popular forbrukslån programs have low IRs. Not only that, but the government also pays the premium on subsidized loans while they are in school.

Security components

All credits are either secured loans or unsecured ones. It refers to whether individuals are putting up valuable assets, also known as collateral, to guarantee their mortgages. If people have a secured credit, it means they have guaranteed their lending firm will be paid one way or another by providing them claims on something valuable they own. If the credit goes unpaid, the financial institution can seize collaterals to regain their investment.

These guarantees provide lending firms an excellent deal of security and allow financial institutions to charge low IRs. Unsecured mortgages don’t require any properties or items of value as collateral from borrowers.

Unsecured credits don’t require any collateral from borrowers. Financial institutions, therefore, have no safety net if the borrower does not finance their monthly premium.

Check out https://www.foxbusiness.com/money/unsecured-loans-everything-to-know to know more about unsecured debentures.

These unsecured loans usually have higher IRs than secured credits. Financial institutions usually require that an additional individual co-sign for these types of mortgages or vow to pay them if the borrower fails to pay their premiums. Student credits have the advantage that no collateral is needed, but they still have low IRs.

Terms

Terms of loans are the length of time that borrowers need to pay back their mortgage. A lot of these mortgages have terms of five years at most. Some student loans have ten-year payment periods. Usually, the longer the payment term, the higher the IR. Terms are the maximum time borrowers need to pay their premiums; mortgages can always be paid before the term expires.

A Case Study

To see how these pieces fit together, let us take a closer look at a simple sample loan.

Person A takes out a small $10,000 mortgage with an IR of 8.25% on a ten-year period. Since it is a secured loan, Person A uses her Hyundai Reina as collateral. Person A’s credit breaks down as follows:

Loaned amount: $10,000

Interest Rate: 8.25%

Years to pay: Ten years

Minimum monthly premium: $122.65

Total premiums: $14,718.49

Paid interest: $4,718.49

The minimum monthly premium that Person A needs to make to pay the loan within the ten-year term completely is at least $120. After 120 premiums of at least $122, Person A will have to pay her entire loan and at least $4,000 in interest.

People need to keep in mind that Person A can always increase her monthly premiums. It will shorten her mortgage’s term and will result in less money spent on interest rates. For example, if Person A decides to spend two hundred fifty dollars each month, her payment plan will look like this:

Balance: $10,000

Interest Rate: 8.25%

Monthly premium: $250

Number of payments: 47

Total premiums: $11,734

Interest paid: $1,734

By paying more on monthly premiums, she shortens her mortgage term to 47 months, four years at most. Person A also minimizes the amount of interest paid to $1,700. Let us say that, instead of increasing her premiums, Person A skips a couple of months.

As a matter of fact, let us say she stops paying the mortgage altogether. That is bad news for her; since it is a secured credit, Person A may lose her Ford Mustang. That is why when planning to take credit; individuals need to pay a lot of attention to the terms to anticipate how much they will pay and how long they will be in debt.