Is this the first time you are going out on the loan market or maybe the last time you looked at loans was about 10 years ago, when you bought a house?
A lot has happened since then and the market has developed a lot over the last few years.
It can be a jungle when navigating the loan market. Whatever loan you might be looking for, there are equally as many different concepts as there are loan providers, which can be daunting to understand and more so to choose the one best suited for your needs.
The different loan types
You have probably heard terms like principal, grace period, term payment, standing loans, annuity loans and serial loans. Before you move into the loan market in Denmark, we want to give a brief introduction to the different concepts that are good to know as well as the different types of loans, whether private or business.
- Principal
Your principal is how much you want to borrow. Essentially, principal is the amount you get paid out. - Installments
Installment is the term used for what you pay for offsetting your principal. Essentially, it’s you paying back your loan. - Interest
It is the price of the loan from the loan provider, in the form of a rate that you pay on a frequent basis. Interest rates typically fluctuate and are often affected by happenings around the world, at the same time they are also affected by supply and demand. - Term payment
When the price of the loan is added to the installment, you get the term payment amount. The amount decrease can vary from loan agreement to loan agreement, it can be annual, semi-annually, quarterly, or monthly. - Grace period
This means that you do not pay off the loan, but that you only pay the price of the loan in the current period, not the interest. Grace period can be a good idea, it can give some air during a tough period. Just keep in mind that a loan will never get cheaper by one month of grace period. - APR
Annual percentage rate is what you can use to compare the individual loans. This is an annual interest rate expressed as a percentage, i.e., the total price it costs you each year to have the loan.
It is important to understand the composition of the term payment. This is where the big difference between different loans lies. - Standing loans
Let’s say you get a loan of a fixed 4 years. With a standing loan of 4 years, you will pay the price (monthly fee or interest) of the loan at each term of the loan only for those 4 years. At the last term, the entire loan will be repaid together with a month's interest or fee.
This type of loan is great, if you have a larger investment and only get your money back after some time.
With a standing loan, you must be prepared towards the end of the term to pay a large sum, as the entire loan must be repaid at once.
Typically, it will be possible to get a lower interest rate with this loan since one is tied up. It can also be more difficult to take out new debt while you have your standing loan, should your financial starting point change. - Annuity loan
An annuity loan is typically the loan most people come across, either when buying a car or a house.
The loan is characterized by the fact that you pay the same amount at all terms during the life of the loan. This means there is a fixed term payment. What changes during the life of the loan is the distribution of the payment between interest and installments. To begin with, it will primarily be interest you pay, and as you pay off on the loan, the benefit will to a greater extent lean towards installments than interest.
At the beginning of the loan term, you will have a feeling that your term payment is not that high, that’s because the interest you pay will be deductible on your tax return. But you need to remember that as it falls during the loan term, you will not feel that the debt is getting financially smaller. As the payment becomes more as installments and less as interest. It is an advantage that you know how much you have to pay every month, and this does not change. - Serial loans
With this type of loan, you will pay more at the start of the loan term and less at the end of the loan term. The instalment amounts therefore become smaller as the loan term progresses.
This is done by the loan's term payment being composed of a fixed installment and an interest rate. The fixed installment means that every month you know what you pay off on the loan, the interest on the loan also comes on top, but since you pay a fixed amount off on the loan, after relatively few months’ you will notice how the amount you pay in becomes smaller. Since the interest rate is calculated every month based on the open principal.
In other words, the serial loan differs from the annuity loan in that your term payment will decrease as you approach the end of the loan.
The loan market is in a rapid development. Not only do the interest rates change frequently, but also the way you borrow money. Therefore, remember to ask questions and be critical of the answers you get from the loan providers. We recommend that you look for multiple offers from several different banks to get the best loan deal.