How much do you know about loans and the several types of them that are out there? Can you tell a secured loan from an unsecured one? What about some of the other terminology out there like “collateral,” “interest rates,” and more?

If you are not an expert on any of this, there is nothing to worry about.  You probably do not need to have professional-level education on any of it. However, I do think that getting some baseline knowledge on it can be helpful for us as we continue into our adult lives. What do I mean by that?

At this point, a fact of life is that we will probably need a loan at one point in our lives or another.  Whether it is a mortgage to buy a home or an auto loan to get a vehicle, they are kind of important.  Therefore, educating us, at least to some extent is not a bad idea.

The Types of Loans

For some general knowledge before you proceed, try checking out this resource: https://www.debt.org/credit/loans/. There are plenty of others out there, but I used it in my research, so it may be helpful. Moving on, though, there are of course many different categories of loans to familiarize ourselves with.

Secured Loans

Starting strong with “secured” loans – these are the ones that most of us already know. Those mortgages and auto loans that I mentioned above fall under this umbrella.  So, how can we define them then?

When borrowers get funds in this manner, they offer something of their own as collateral. What is collateral, though? Anything of value can technically serve as it, but in the aforementioned examples, the collateral is the property or the vehicle.  So, if you are unable to pay the money back, the bank or credit union will simply seize what you put up as a bartering chip.

There is of course more nuance to it, but I wanted to keep things simplified here today to make it easier to explain.  Too many advice columns and blogs tend to throw in a bunch of jargon and difficult terms. From my perspective, which seems a bit excessive.

With so much at stake in this category, you may be wondering why anyone would choose this route anyway. Well, for something like a secured credit card, it may be because a borrower has no other option.  We see that fairly often for those that have a bad credit score or simply no credit history.

However, for the bigger purchases, we can boil it down to the fact that these types tend to have much lower interest rates. Of course, this is because there is something else that the financial institution can seize if you fail to pay.  However, that additional insurance means that they tend not to need to raise interest rates.

Unsecured Loans

Take everything that you learned above about the secured category and inverse it, and you will get an understanding of what an unsecured loan is.  Obviously, this is an oversimplification of a hva er lån uten sikkerhet, but it is a useful tool in terms of reorientating your mind as we shift gears.  

In these, there is no collateral. Typically, they come in the form of a personal or a private loan, though there are other possibilities as well (namely, credit cards). Rather than taking a property or vehicle if you fail to pay, the lenders in this circumstance just charge more to let people borrow in the first place.

How does that work, though? The cost of borrowing money comes in the form of interest rates. For the unsecured category, there tends to be a higher cost. That is because the lender does not have that additional insurance of getting something in return if the person that they give a loan ends up defaulting.

Looking at how they operate in practice, typically you end up getting the amount agreed upon in one large, lump sum.  Then, you will be responsible for paying it back within the designated length of time that you decided with the lender in the initial contract. 

At first glance, they may appear like a no-brainer as opposed to the above type.  However, as this article points out, https://www.nerdwallet.com/article/loans/personal-loans/unsecured-personal-loans-no-collateral, there are still some downsides to them.  Most notable is how expensive they can turn out to be over time, especially if your repayment period is long.

The Bottom Line: Do Your Research Before Borrowing Money

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No matter which archetype of loan you decide that you want, it is especially important that you read about the options that you have within that category. Compare and contrast different lenders to decide which you would prefer to work with. Remember that it might be a long-term relationship, so if you do not like their business practices or overall values, it may not be a good fit for you.

Sure, it might seem like a hassle at first.  I totally understand that. Given how limited our free time tends to be these days, it seems like a waste to spend it on something like this. Even for those of us that enjoy research (myself certainly included), it can be a bit draining.

That being said, though, it is still something critical for us to consider. Otherwise, we could very easily get stuck in a credit agreement that is not in our best interests.  Take a critical look at your own finances, too, since it is generally not advisable to borrow too much money at once – especially if you do not think that you can afford the monthly bills because of it.

There is nothing wrong with borrowing money and having debts in a moral sense, so if that is one of your concerns, hopefully, that can ease it. Getting a loan is part of financial planning. Just take what I have said into account as you go shopping for a lender and do not be afraid to ask the important questions!