If someone needs a loan and starts looking for different bank offers, the first thing he faces is that there are plenty of different credit products on the market. Even the same type of credit products may have very large differences in interest rates or other terms.
What credit products do you have, what is it for?
Those who are not sufficiently informed about the secrets of the credit market can hardly see the wide range of offers and find the most favorable credit product and conditions for themselves. In this post, we help you find out more about the different credit offers and know what you need to pay attention to before you choose.
The purpose of the loan
The first thing that can narrow down the options that can be negotiated is the purpose of borrowing. There are loans for free use and for specific purposes. If you want to borrow a house for house purchase, you should definitely think about real estate mortgages when the property serves as collateral for the loan.
In the case of a loan intended for the purchase of a durable consumer product, please consult the goods credits, the terms of which may be very favorable. And if you are going to have a sudden, one-time release, you can choose a free loan, a personal loan.
If you want a credit line to finance your current spending, you should think about credit cards (credit accounts). These are useful if you spend your money in addition to the money you have at your disposal on a regular basis, but you can repay your income from your income (month) on a regular basis.
Loan with collateral and without collateral
Based on the above, two basic types of beliefs are outlined:
- secured with collateral and
- unsecured loans.
The former is characterized by the fact that it serves as a guarantee for the repayment of the loan disbursed by a movable or immovable property (whether by pledge or lien). Thus, the lender bears less risk if the debtor is unable to pay for some reason, the collateral asset ensures that the borrower gets his money back.
There is no such guarantee for uncovered loans, there is some guarantee of the debtor’s identity and income. Consequently, the risk of lending is higher. Banks are exposing these risk differences to loan conditions: you can obtain a loan on a more favorable condition if you take out a loan for a specific purpose and can provide coverage for it. If you can do these things, it’s better, don’t think about a more expensive construction loan!
Loan Amount, Interest and Maturity
When someone takes credit, the three most important questions are that
- how much,
- what interest rate or
- how long does the repayment take?
These three factors give the installment, ie the amount the debtor has to pay monthly until the end of the repayment. In any case, you should consider the amount of credit that you can pay without any problems in each month.
The installment can be reduced in three ways:
- with lower loan amount (prepayment after disbursement),
- with lower interest rates and
- longer term loan.
It is recommended to borrow only as much as is strictly necessary when borrowing, thus minimizing the level of indebtedness. If there is no way to further reduce the amount, then you have to choose a structure where interest rates are lower: it is worth comparing a number of offers, or, as we have seen, covering the loan – these may lower interest rates. Ultimately, the repayment term can be extended. However, it is worth to be cautious: although it results in a reduction in the installment, it increases the total amount to be repaid.
Another aspect to be mentioned is the change in interest rates during the repayment of loans. Are
- fixed interest loans and
- floating rate loans.
In the case of the former, the interest rate does not change during the repayment period, and remains at the rate specified in the contract. In the case of floating rate loans, interest rates may change from time to time, following changes in market interest rates. The period of change may be short term (3 months, 6 months, 1 year) or longer (3 years, 5 years, 10 years). This is undoubtedly a risk, as an increase in interest rates will result in an increase in the repayment installment.
For security reasons, it is recommended that you choose a fixed-rate or long-term fixed-rate loan, but in some cases it may be advantageous to have a fixed interest rate in the short term due to lower interest rates. However, you should choose this only if you are not expecting a rise in market interest rates and you are risking or hoping for a higher level of income in the future, from which you will be able to pay your installment at rising interest rates. As a general rule, in the case of floating rate loans, a lower repayment installment may be undertaken than the debtor could pay (and save the difference) in order to avoid the problem of repayment of the loan in the event of an increase in the repayment installment.
We have presented general considerations above, which may arise in connection with loans, but the most important advice you should take into account is tailored to your specific needs and financially, always looking at the range of offers from several banks. To do this, credit calculators help you, but always start with the terms of the offer you have made after the credit assessment before you decide to borrow.