Loans are often mentioned in negative contexts where they talk about the risk, greater financial uncertainty, expensive interest rates and that they can lead to a fall in the debt trap. But loans are at the same time something that can be good and needed in certain parts of life and the private economy. Here we will go through three situations where a loan is a good thing rather than a dangerous and expensive story.
The reason for this article is that there is quite a lot (even on our part) written about the risks of loans, bad loans and opportunities when you should avoid borrowing money. But you can’t just focus on the negative and given that loans have a natural place in our financial everyday life, it can be in place with a positive article.
So we will go through a few different situations when a loan is good and when it is appropriate to borrow money. We explain why it is good and give some general tips to make the loan better and safer.
Borrowing to spend money on luxury consumption is a generally bad idea. It is not smart to buy a jacket or purse with borrowed money. This is because a loan firstly costs you extra money in the form of interest and fees but also because loans create a greater risk in your finances.
The jacket and purse represent things that you do not need to buy directly with the help of a loan or over the head for that matter. It is luxury consumption and is more about wanting the things than you need them. There are also things you should be able to afford to pay in cash. If you have to lend to them, you should consider if you do not have enough money to make the purchases in general.
However, there are things that are perfectly ok to borrow, just because it is natural that you need a loan to afford them. The very best example of this is the home. It is difficult to afford to buy your own home without taking a mortgage. There are few people who spend more than one million kroner on which they can redeem and use for their housing deal.
A home is also a long-term business where you get low interest rates, pay off for a very long time, etc. The home is the security of the loan and therefore it becomes cheaper. It is therefore a good and cheap loan, which clearly makes it less bad. Other similar things can be car loan, caravan, summer cottage etc. All things may not be a must in this list, but there are things that are usually difficult to pay in cash and which means a pretty good and cheaper loan.
Often it is precisely when buying things of great value that you can get the really good loans when you use the thing as collateral for the loan. Then the lender’s risk becomes clearly lower and also the interest rate that one must pay. This type of cheap loan is much less bad to take than expensive.
For example, if you have to buy a new fridge and freezer, this can be a little expensive. Then the question is how to make a loan. For such things one cannot take out a loan with collateral but must take a regular private loan. It’s a little more expensive. Then the question is whether you buy a new fridge and freeze because the old ones have broken or because you want new ones.
If you only buy them because it is nice with new and not because there is a strong need to buy new (for example because the old ones have broken down or as part of the renovation of the kitchen to increase the value of their home ) it is a clear advantage if you can pay them in cash. A loan always involves some extra costs and risks, so the idea is that you only borrow if it is important.
Of course, you do not have much choice if the fridge and freezer break down and you do not have money so it is enough to buy new ones. One cannot be without these so it must be bought new. However, it should be kept in mind that if you could not afford to build a buffer to cope with such unexpected expenses, there is also a risk that a potential loan will strain the economy more than desired.
Collecting their expensive small loans into a big cheap loan has become popular in recent years and many lenders and banks are talking about collecting loans or solving expensive loans. The principle is simple. High-interest loans are bad because they give you a high monthly cost that can be a burden on your budget. Often it is a little smaller loan that has high interest rates.
Anyone who has accumulated a number of such expensive little smaller loans will probably pay a lot each month just in interest expense. If you have a bad or strained economy then it can be difficult to get out of this and sometimes people take even more loans to try to clear their old loans and other bills.
Instead of taking out a large, low-interest-rate loan, you get enough money to pay off all the less expensive loans directly. By doing this, you get several benefits. Firstly, you collect all the different loans for a loan and then you get clearly less work with the administration and payments etc. Secondly, the interest rate is often lowered considerably.