Loans are a complicated subject to talk about, no matter what sort of context it’s in. Unfortunately, it’s also an important part of adult life. Debt isn’t really comfortable or fun to have on our shoulders, but it’s a fact of life for most people. So, are there ways that we can manage it?
That’s what we’ll be looking to cover today, although it can get a bit complicated sometimes. You see, part of it involves knowing the difference between “bad” debt and “good” debt, which already sounds a bit strange. The thing is, there are types of debt that are totally okay, if not beneficial, to have.
If you’re not sure what that looks like, though, it’ll be covered further on in this article. For now, just know that it can play an integral role to managing our finances overall. From credit scores to collateral, here’s everything that you should know about getting a loan.
What are Loans?
Before we even attempt to tackle some of the more complicated stuff, let’s go ahead and get the basics out of the way. A loan is a credit agreement that’s made between a lender and a borrower. Typically, there is a contract that’s signed that outlines the expectations on both sides of the agreement. Additionally, it’s always made with the assumption that the amount that’s borrowed will be paid back.
When you’re a borrower in a situation like this, you’ve now got what’s known as “debt.” That just means that you owe someone or some institution money. While throughout much of human history there’s been a lot of stigma surrounding “debtors,” today, we’ll try to unravel that at least a little bit.
After all, there’s really nothing wrong with needing a loan. In a lot of contexts, it can even be a positive thing, since it’s helping to build your credit score each time that you make a repayment on time. However, if you have been taking out loans irresponsibly, it can start to negatively impact you. Naturally, that’s probably where the stigma stems from in the first place. Folks tend to assume that this is what’s going on if you bring up debt at all.
Usually, though, that’s quite far from the case as far as what’s really going on. In some parts of the world, they could be talking about student debt. While that’s really not something that goes on much in Norway, it certainly is prevalent in North America. Additionally, mortgages and auto loans are also considered to be debt, but they’re pretty much necessary for getting a home or a car.
Credit Scores: What’s the Scoop?
Since it’s been mentioned a few times so far, let’s go ahead and cover credit scores. No matter where you decide to apply for a loan from, they’ll probably want to know this figure. You can see it talked about here, https://www.forbrukslån.no/, if you’re totally unfamiliar with what it is and how it works.
Thankfully, it’s really not that difficult to understand what credit scores are. There are three major credit bureaus that track the history of your loans, debts, and even bills. Their primary goal is to help lenders know how trustworthy an individual is as a borrower.
For instance, if a person is constantly late on their bills and repayments, it demonstrates that they aren’t overly trustworthy with money. The downside is, of course, that these numbers don’t exactly account for potential extenuating circumstances that might be significantly impacting a person’s ability to pay off their bills.
So, in that way, it can be frustrating to have so much of our financial lives and health revolve around these three little numbers. That being said, if your score isn’t very high right now, that’s okay. There are still lenders that will work with you (although you might have to face higher interest rates), and there are plenty of ways that you can raise your score over time, as well.
“Good” vs. “Bad” Debt
When it comes to the differences between “good” and “bad” types of debt, on the surface it can appear like it’s a fairly arbitrary classification. To some extent, it is kind of subjective and depends on who’s looking at the amounts owed. However, there are some basic guidelines to be aware of that can help guide some of your financial decisions.
Let’s start with the positives. We can define a “good” debt as a credit agreement or loan that will add something of value to your life, in some form or another. It could be an investment of some sort or something that adds to your overall net worth. A common example is the student loan, but there are also a few other types that count.
Mortgages are also rather commonplace, of course. It’s pretty hard to buy a home without one, these days. Small business expenses are also under this umbrella, especially if you’re the owner of one and are trying to improve something like inventory capacity or production capabilities. By now, you’ve probably got the idea here, so let’s shift gears instead to the “bad.”
Unfortunately, there are a lot more bad forms of debt than good ones, though that’s probably to be expected. As far as defining it, it’s pretty simple – the opposite of the good kind. If the loan or credit agreement in question is lowering your net worth overall instead of raising it, then it’s in this category.
That’s not to say that you should never have these types of debt. At some point, it’s going to be inevitable. The biggest example of it is a credit card, and it’s pretty hard to build up a credit score without one. What’s important is finding a balance between the two so that you aren’t tanking your net worth with a bunch of irresponsible borrowing. That’s when there can be real problems.
What is “Collateral?”
Next, we can tackle the question of what collateral is in respect to loans and credit agreements. When a loan has collateral attached to it, that means that if the borrower defaults on it or is unable to make payments, the lender will take possession of whatever has been staked as this. The most common examples are property or vehicles, since mortgages and auto loans are prominent types of loans that have collateral.
However, most consumer loans don’t have this anymore. Most people simply prefer to borrow money without this sort of thing hanging over their head. Higher fees or interest rates are usually worth the trade off, depending on the situation. Either way, if you’re looking at consumer loans, you may want to ask about whether or not this is something on the table.
Improving Credit Scores and Reducing the Stress of Debt
When people hear about how they can potentially boost their credit scores and even reduce their debt by taking out another loan, it usually leaves them skeptical, to say the least. That’s certainly understandable, of course, considering that it seems a bit too good to be true. However, this really is the case, and you’ll understand soon here.
The primary way that this is accomplished is through refinancing, which is when you take out another loan to pay off one that you already had. It can be through your current lender or through another one. The goal of them is to change the details of that original agreement, which can make a pretty big difference for a person.
That’s not the only way, though. In terms of improving your credit score, there are certain credit agreements that are specifically dedicated to this purpose. They’re typically small amounts of money that can be paid off over a few months or a year (approximately), allowing the borrower to have a bill that they can easily pay each period. In turn, this boosts their credit score, since it demonstrates that they can be trusted to repay their debts.
Final Notes
Loans and debt can be hard to wrangle, especially if you are one of the millions (maybe even billions) of people across the world who are living from paycheck to paycheck. It’s one of the biggest worries for a lot of developed countries, too, considering a ton of citizens everywhere are in staggering amounts of debt. That’s probably why there’s such a push for education surrounding these things now, whereas that wasn’t really the case even just a few years ago.
Remember – you don’t have anything to be ashamed of if you have credit card debt or any other type, really. Things happen, and sometimes people just need a hand up in life to achieve their goals. Often, a credit agreement can be the little influx of cash that they need to get themselves back on their feet.
Despite that, it’s still important to pay careful attention to your spending and budget each and every month. After all, if you are reckless about it and put a ton of money on a credit card, for example, the interest rates alone could end up plunging you into deep debt that almost feels impossible to surmount.
With all of this in mind, don’t be afraid to apply for consumer loans and personal loans. Since they’re so flexible in terms of what you can spend them on, often they’ll end up being used for the “good” types of debt. Even renovating your property can end up adding to your net worth, so it’s not a waste. Just make sure that you’re not going to end up needing to give collateral up, since that can be a pain.
