This short guide aims to clarify your ideas on what a personal loan is and how it works. Above all, it is essential to understand how the loan installment is calculated and what values affect its final amount.
Whether you are applying for a new loan or you already have one, here you will find what you need to remove any doubts.
Purpose of the loan
The most common formula is that of the loan known as “consumer”. Loans can be finalized or non-finalized.
The difference is very simple and foresees: for loans aimed directly at the purchase of a specific good or service (whether it is a car, a holiday, a piece of furniture or whatever) as long as the purpose of the financing is clear and defined and traced means of payment (checks or wire transfers) are used; in the case of non-finalized loans, the requested sum is directly entered into the customer’s current account which can freely dispose of it.
It should be emphasized that banks and financial companies increasingly tend to pay sums as loans only if they are well informed about the purpose and destination of the money, subsequently checking the sums are used only for the stated purposes.
Guarantees and incidental expenses
As a matter of practice, the granting of the loan is not subordinated to the obligation to issue a real guarantee (pledge or mortgage) on assets owned by the client, as is the case with mortgages. This does not mean that the lender may request additional guarantees to decrease the risk of insolvency.
The most commonly used guarantee is that of the signature of a co-obligated or third-party guarantor who can intervene in the event of default by the principal debtor. It is not such a remote possibility, it is easy to be asked if you have a fixed-term contract, or have little seniority; or if you require a high amount.
Another tool that banks use to lighten credit risk, and increase their profitability, linked to this type of practice may be to offer you an insurance policy linked to the loan.
Operation is very simple.
The most common ones cover the death and permanent disability of the funded. Sometimes they may also include specific coverages for loss of employment.
The policy amount can be financed with the loan or paid separately. In the event of a negative event, the insurance company undertakes to pay off the residual debt.
Often they have a not insignificant cost and certainly have their objective utility, especially for fairly high amounts, so take a moment to evaluate the loan, regardless of whether the bank proposes it to you first.
TAN and APR
We begin to clarify the meaning of these two very important acronyms that you often hear mentioned, especially in banks and financial commercials.
The TAN, nominal annual rate, represents the interest rate applied by the bank on the sums lent and the installment amount is calculated on this. The TAN can be fixed or variable, although fixed rates are usually advertised more often.
The APR, the annual percentage rate of charge, on the other hand, includes all the ancillary charges and expenses, such as for example preliminary investigation or installment fees; and insurance policy if financed within the loan.
Consequently, the APR is a very important indicator that allows us to evaluate the overall cost of the operation at first glance. We must pay close attention to this fact; sometimes advertised much less than the TAN; because you may also see proposals with a substantial difference between one rate and another.
This is because a very low TAN is sometimes used to attract more customers, which is true, but if the APR is much higher it will mean that what the bank or financial company discounts you in terms of rate recovers it through accessory costs . So always pay close attention.
The APR is a fundamental factor for the comparison of different loan proposals as we will see later.
How do you calculate the installment of a loan and what factors affect it
There are several factors that can affect the final amount of your loan installment and it is important to know them to properly calculate how much you are going to pay monthly.
We have already talked about TAN and APR. The first is the one actually used to calculate the installment on the capital required, the second is the one inclusive of charges and expenses.
Another important factor is the duration.
A longer loan, and an equal amount, will obviously correspond to a lower installment. Be careful though, because if it is also true that the installment is lower by taking out a loan of one or two years longer, the interest you will pay will be greater; therefore in the long run the outlay will be greater. Loans are usually offered over five years (sixty months), but some banks or finance companies even go up to ten years.
The investigation costs affect the installment and can be more or less high depending on the bank, or even exempt. Sometimes installment collection costs may be present, usually a few USD fixed on each installment.
To calculate the effective installment that you will pay monthly you can use the numerous websites that make calculators very simple and intuitive.
We advise you to use the APR to have a unique comparison for all the proposals. After the rate, enter the amount and duration and you’re done.
Early repayment of the loan
You may find yourself on the occasion of taking out too long a loan or simply wanting to eliminate it. It’s not a problem.
The loan can always be paid off in advance by repaying only what was really due up to that moment.
Attention should be paid to the cost of early repayment. By law, it cannot exceed 1% of the amount financed, but depending on the case, it can be a considerable expense and may compromise the advantage of paying off the debt early.
Evaluation by the bank
Although obvious, the granting of the personal loan is always subject to a preventive evaluation by the Institute. The degree of risk of the practice will also be judged on the basis of your credit history and reliability (if you have already had loans and have regularly paid them, play to your advantage).
Your ability to support the monthly commitment based on your income level will also be estimated.
Attention must be paid to the fact that banks can see, with your consent to Crif, if you are requesting the same practice from multiple institutions at the same time or if it has already been refused in the past.
The advice is to be honest and if there are no preconditions for setting up the practice, postpone the idea of requesting a loan, as a report of refused practice can also compromise your future requests.
Compare different loans and conclusions
Once you know the factors common to each personal loan, you just have to look for the most convenient one for you. As mentioned earlier, there are specific websites that allow you to calculate the monthly payment by entering a few essential data: amount, rate and duration.
Often and willingly, these sites already offer you a list of cheaper banks or financial institutions. Otherwise, look for a special comparison site such as facile.it or segugio.it to name a few.
Remember to pay special attention to the APR and go in search of the best loan for your needs.