When you want to get credit, you probably focus most of your attention around a single item: the rate. The rate of a credit indicates the percentage of interest that the bank or credit organization will generate by giving you the amount you need. Are you right to focus on this rate? Is this the central element of a loan offer? Yes! And here is why.
The annual percentage rate, the rate you need
When talking about the rate of a loan, consider the annual effective rate (APR). This is the rate you should look at first. The overall effective rate (the TEG and APR names exist) includes indeed the interest that you will pay, but also all the additional and compulsory expenses that can be added.
The annual percentage rate (APR) or annual percentage rate of charge (APR) includes:
The basic interest rate. This is the nominative rate, which refers to the remuneration of the bank with the interest generated by lending you the sum;
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Fees, commissions and miscellaneous remuneration. In this category, notably, registration fees, processing fees … that is to say, all forms of complementary remuneration, which are not directly linked to a percentage of the amount borrowed;
Finally, as part of a consumer credit, you may be required to pay insurance premiums. When compulsory insurance is taken out simultaneously with the lending institution, then its rate is added to the nominal rate to form the APR.
Now that you understand the detail of the rate expressed in a credit, let’s take an example. Imagine that you want to borrow the sum of € 20,000 with a refund over a period of two years, and that the rate offered to you is 5%.
So that means that you will have € 1,000 of interest to settle if the APR is 5%, and that no fee is required. On the other hand, if a processing fee is added to the credit of € 200, then the APR increases to 6%. The nominal rate does not change (5%) but the application fees add 1%.
That is why the rate is a key element of a personal loan, and you need to watch the APR, which is a reliable indicator to determine the total cost of a loan. The nominal rate alone is not enough.
The rate is a tool for comparing offers
At the end of the 1960s, the concept of annual percentage rate of charge appeared in the law. Thus, thanks to the Consumer Code which protects borrowers, the mention of the overall effective rate is mandatory in all written documents relating to a loan.
This obligation gives borrowers an obvious advantage. Individuals can use this reliable indicator to have a good summary of the total cost of the loan they are going to see, and can compare offers between them.
The overall effective rate is a bulwark for the consumer, a guarantee that other costs will not be integrated later, and that the proposed rate is biased. No hidden fees or unforeseen financing imposed at the last minute if the total effective rate is exposed to you.
The comparison between several offers of personal loan becomes very simple. You can conduct your comparison independently by using the solutions available on the Meilleurtaux.com website.
The rate is the most important criterion, but it’s not the only one to watch
Now that we have seen the importance of the rate when you are looking for funding, and in particular the focus you need to achieve on the overall effective rate, do not sweep too quickly the other criteria that matter.
For a complete reading of a credit offer, consider the APRC as the primary indicator, but also consider the following criteria:
The possibility of varying the monthly payments: by signing a credit offer, you agree on the repayment of a monthly payment, with a known amount. However, you are not immune to events that could upset your financial balance. What can happen in this case?
Predict the worst by checking that the contract provides for varying monthly payments. In repayment, you must have the freedom to increase the amount of the monthly payment, reduce the amount, or even carry a postponement.
Some contracts propose to increase up to 10% per annum the amount of monthly payment (mortgage) or the pause of the credit up to 6 months with a delay of the repayment date or a recalculation of the monthly payments;
Early repayment solutions: if you receive a large sum of money, or if you have enough savings to be able to stop repaying a loan, what are the conditions proposed by the bank?
In most cases, prepayment penalties apply. These are allowances, since the bank loses money by allowing you to repay at an advanced date. These penalties are highly negotiable, especially if the refund is made with your money, and not after the purchase of the contract by a competing institution;
Types of insurance: take a good look at how the insurance premium that is offered to you as part of a credit is calculated. Is it a bonus the amount of which is fixed or decreasing? It’s up to you to see the total cost of this insurance to know which option is the most interesting;
The commercial relationship with the lender: Finally, do not neglect the relationship aspect with your lender. Having a good contact with your financial advisor, whether based in a local agency or via an online platform is essential. By having good exchanges, you can notably benefit from more leniency in case of difficulties, or even obtain preferential conditions for another project.
Conduct your own comparison of different loan offers using the tools made available by Meilleurtaux.com ! They are available for free and you can get offers in a few clicks, without commitment.