Borrowing money – Borrowing $ 1,000 to 600,000 without collateral – Unsecured Loan
To minimize the cost of the loan, it is good to have a basic understanding of the structure of the loan. Most people understand that an effective interest rate is good for comparing loans, but more then? Almost all unsecured loans (private loans without collateral) use annuity. This means that you repay the loan by paying monthly a fixed amount that is equal to the maturity, ie until the loan is fully repaid. Annuity makes it easier to decide if you can afford to pay this monthly amount, but it really does not provide a quick and easy understanding of the cost . We use the word “sum” for the monthly payment because, according to its strict definition, it is not a mere cost.
Amortization and interest
Each monthly payment consists of amortization and interest . The repayment is the installment of the loan and the interest is the cost . To this may be added any fees. The monthly interest cost will always be higher at the beginning of the term. At the end, the monthly payment consists mostly of amortization. As already mentioned, most loans use annuity, but there are also loans with straight amortization. Account credits are often revolving and are repaid with a minimum monthly amount each month, which means that price reporting requires a completely different format than the others.
Effective interest rate
A good way to compare the loans against each other is effective interest rates . It can be compared to the food price comparison price. Since most are not mathematicians and have also forgotten school mathematics, it is easy to forget a significant part when comparing effective interest rates: you have to compare the loan on equal terms. You cannot compare a loan with a maturity of 3 months with a loan with a maturity of 12 months. You must compare the loans on the same terms. In order to be strict, at least one year’s maturity must be selected. If you compare with different conditions, you can at most decide how aggressive a loan is for your scheme. However, it is our own way of explaining the difference and more understanding of this you will find in the section on effective interest rates for sms loans.
Choose the right maturity
You cannot save money by setting up the loan for a longer term than you need (due to lower monthly payments) and “repay faster”. The only thing that happens if you choose an unnecessary maturity is that you add a higher cost at the beginning of the loan period.
So much more expensive will be a longer maturity
In the example below, two loans are shown where everything that sets the arrangement apart is the maturity. The annual interest rate is 12.90% and the planning fee SEK 495. Note that it is easy to market the loan which is much more expensive as you can always point out the low monthly amount and a lower effective interest rate.
But again: effective interest rates must be compared on the same terms and in this case, there are different maturities, which will be wrong.
Cost difference first 12 months
Note that loan 2 will be almost twice as expensive as early as the first year even though it is easy to make in positive days. You still have about 42,000 deusstom to repay, while the first loan is fully repaid.
Graph of cost trends
Here we have only included the cost, no amortization is included so that you should see more clearly the importance of choosing the right maturity.
Collect your loans – cut interest costs!
Collecting loans means that you collect your small loans with high interest rates in a larger loan that offers lower interest rates. This may mean that the loan will have a lower capital cost. However, keep in mind that there is no guarantee as the loan will most likely be set up over a longer term. The text above gives you a good basis for deciding whether an unsecured mortgage loan (also called it) is a good idea or not for your particular situation. In a tricky situation where the size of the monthly payments is the biggest problem and not the cost of capital , it could be justifiable to change the loan even if it resulted in a higher cost of capital. Of course, it assumes that something more serious happens if you are unable to handle the monthly payment, eg. that the case goes to Coresave lending.