Applying for a payday loan is a very common way of covering certain expenses that exceed our payment capacity- navigate to these guys. Buy a car, renovate the house, organize a wedding, pay for studies… there are many ways in which our savings are reduced in order to pay for expenses or, directly, we may prefer to request the money from our bank to then repay it gradually, without having to pay for that mattress that we’ve been saving for years all at once.
Whatever the reason, when we go to a bank we should know precisely what amount of money we need and what our payment capacity is since they are two important factors that the banking institution will take into account when deciding whether or not to grant us the loan.
The key aspects of a personal loan
To choose the loan that best suits our needs, we must pay attention to three key aspects:
The capital we are asking for
This is the total amount of money being requested. The majority of banking institutions offer loans from €1,000 or €1,500, while the financing limit depends largely on the profile of the customer requesting it.
The interest we have to pay
This is the price of the money they lend us, which the bank charges for giving us a certain amount of money and running the risk of default. It is represented as a percentage which is referred to as the APR and NIR. Let’s take a quick look at these two concepts:
- The acronym NIR refers to the Nominal Interest Rate, the price that the bank charges for lending us money. It is calculated on the basis of a percentage on the capital lent to the customer. This percentage is applied to the capital outstanding at any given time. The NIR does not include any fees the loan might have.
- The APR is the equivalent Annual Percentage Rate and, just like the NIR, represents what the loan costs, but this time including the fees and other expenses that can be associated with the granting of the loan.
Therefore, when analyzing the interest rate of the loan and comparing between one bank and another, the APR is the figure we should pay attention to.
The repayment period
The third most important factor when applying for a loan is the period of time over which we are going to repay it – the so-called repayment period. This period typically ranges from two to ten years, although these periods can vary from one bank to another.
It is important to carefully choose the period over which we are going to repay the loan since, although a longer repayment period will make the monthly installments smaller, in the long run, it will also result in us paying more interest. On the other hand, a shorter repayment period will increase that monthly installment but will make our loan cheaper.
What does a bank look at when deciding whether to grant us a loan?
When a banking institution lends us money, it is trusting in our ability to repay the amount lent, as well as the interest charges that have been set beforehand. In other words, the bank runs a risk and needs to make sure that as customers, we are going to be able to return the money received. This is why the main criteria when analyzing any loan application is our monthly income.
The most important thing is to have a regular source of income and for this income to be sufficient to enable us to pay the monthly installments. This is why the indebtedness coefficient or ratio is used, a percentage that ranges between 35% and 40%, above which it would not be safe to lend a certain amount of money to a customer. In other words, if the monthly installment we have to pay represents more than that 35% or 40% of our monthly salary, the bank will not consider it safe to offer us a loan under those conditions.
In this situation, we would have to modify one of the aforementioned parameters in order to get our financing: either requesting less money, trying to find a bank that asks us for a lower interest rate or opting for a longer repayment period.
While our income is the most important factor in determining whether or not a loan is granted, it is certainly not the only point that banks take into account when studying our application. The number of account holders that request the loan is also considered since two salaries (or demonstrable sources of income) offer a greater guarantee of repayment than just one.
Another key factor that can tip the balance in our favor is our case history as customers and payers. If over the course of our lifetime, we have paid all the payments of other loans or credits on time, the bank will tend to trust in us more. That said, clearly, we will be forbidden from taking out any bank loan if we have been included in any defaults list.
Last of all, having assets to our names, such as a house or a vehicle, always provides some backup for our application.
The most common fees in loans
Besides any interest we pay for our loan, the majority of financing products that banks offer have some sort of fee associated with them. The most common ones are the following:
- Start-up fee: this is a small percentage of the total of the loan that is paid at the start.
- Full or partial early cancellation fee: this is paid based on a percentage of the capital outstanding at the time the loan is canceled.
When we are going to request a loan, we must know precisely what our indebtedness limit is, i.e. the maximum monthly installment we can afford to pay without having to suffer financial ‘hardships’. Based on this figure, we can start to explore different options and, just like with any other decision, it is important to compare the different alternatives we are offered.