Oftentimes people find themselves in financial binds that require an injection of funds to bail them out. The most common option apart from soliciting for funds from friends or family is by taking out loans.
A loan is a financial agreement between a lender and a borrower in which the lender gives the borrower funds based on certain conditions. These conditions include an interest rate at which the money has to be repaid, administrative charges and other fees and repayment date(s).
There are different types of loans with different terms and conditions. Globally, there are best practices for loan as a financial instrument. However, different countries and regions have some differences in the regulation of this instrument based on their economic climate and government policies.
In this article, we will discuss the concept of credit loan in Norway to help you understand how it works and how you can engage it positively to benefit from it.
What is Credit Loan?
Credit loans provide borrowers with access to a pre-determined spending limit in an online bank account. In practise, this works the same way as credit cards however; the spending limit is often higher than that of credit cards. This facility can be obtained either with collateral or without collateral.
These loans are not paid out at once just as with your credit card so you are not charged any interest until you spend money from the account. What this means in essence is that there’s money (loan) at your disposal but it doesn’t accrue interest until it has been spent.
The interest rate on this type of credit depends on the bank’s assessment of the borrower’s finances and the repayment duration can be as long as 5 years. You can visit https://forbrukslånlavrente.com/kredittlån/ for more information. You should however know what your interest will be before using the funds.
What is the Difference Between Credit Loans and Consumer Loans?
A casual look at these two types of credit facilities will have you thinking that they are the same; however, they are quite different. The major difference is in the disbursement method of the loans.
Consumer loans are disbursed fully once an application is approved and has a fixed date for repayment. Credit loans on the other hand can be withdrawn as the need arises and repaid as desired within the lifetime of the loan.
Due to the fact that bank loans as consumer loans are also called are disbursed fully into the borrower’s account, payment of interest starts immediately. These interest rates however, are lower than what you pay on credit loans.
How Credit Loans Work
Having seen the difference between a consumer loan and a credit loan, let us go on to understand how a credit loan works. There are many factors that are involved in the process of applying for and administering a credit loan and they include the following:-
As we all know, every kind of financial instrument has fees and charges that make up the cost of engaging the instrument. In the case of this instrument, there is an establishment fee at the setup of the account. Thereafter, additional costs will not accrue unless you spend money from the account. However, once you access the funds in the account, a monthly fee is charged for invoicing.
The total cost of these fees varies among lenders. On average, the establishment fee is usually around NOK 900, and the term fee is approximately NOK 50. Additionally, you also pay interest on the money that you have spent. This interest rate ranges between 6% and 25% and is determined by the credit score of the borrower.
Repayment loans such as consumer loans have fixed instalments which include the interest you have to pay and the principle amount. This interest is calculated based on the amount that is owed and reduces as consistent payments are made.
For a credit loan however, you only pay interest on the amount you have spent. Let’s explain with this example:-
You were granted a limit of NOK 40,000, but you only spent NOK 20,000 from it. The interest will be calculated only on the 20,000. The remaining sum will not attract any interest until you use it. This means that the cost of the facility depends on how much you spend.
Terms of Repayment
The term of repayment for this instrument is flexible just like the repayment terms of credit cards. You can either choose to repay the amount due in full or pay the minimum. This amount is calculated based on the principle of the maximum repayment duration which is 5 years which is usually 3.5% of the entire loan sum. The exception to this rule is if the minimum amount based on this calculation is less that NOK250; when this is the case, the minimum amount to be paid will be pegged at NOK250
Pros and Cons of a Credit Loan
Just as with everything in life, this type of advance comes with advantages and disadvantages. It is imperative that you check out these pros and cons objectively so that you can make an informed decision of whether to go for it or not.
The advantages include the following:-
No Expiry Date
With other kinds of cash advance facilities, you have the loan amount disbursed in full at once and you have to pay it in the instalments agreed upon for the repayment duration (most often 1-5 years). However, with credit loans, you can always access the funds at any time you want as long as you keep paying off your debt. This therefore means that there is no expiry date to the availability of funds until you cancel the contract.
The availability of funds whenever you need it and the leeway to pay as you spend or at your convenience within the ambit of the agreement makes this a highly flexible financial instrument. This flexibility also means that you do not source for funds in the event of an emergency because you already have an account to fall back on.
This type of account provides you with funds whenever you need it. This therefore means financial freedom to a large extent. For example, if you are going on a trip outside of your comfort zone and do not know exactly how much you’ll spend on the trip, this type of account gives you the freedom to enjoy your trip without financial worries.
As mentioned earlier, there are also some considerations to keep in mind with this type of account. Let’s explore two of these aspects: –
Can Lead to Perpetual Debt
The advantage of having money available at all times has led many people into perpetual debt. This is because they lack the financial discipline to manage the account responsibly by taking out only the amount they need and paying it back when due. This therefore means that this option is not for people without financial discipline.
Can Affect your Creditworthiness
When assessing a loan application, one of the things a lender does is to check out the borrower’s financial records. Any outstanding credit whether used or unused is regarded as a debt so if your credit loan is high, it will affect your creditworthiness.
This will in turn affect the amount you can get especially for mortgage. Therefore it is recommended that you apply for only sums that are well within their income and can be easily repaid.
We have taken out time to discuss the basics of a credit loan, made comparisons to consumer loans, and explored their advantages and considerations. We believe that you now have enough information to make an informed decision when the need arises.