Explanatory guide to loan terms
What you need to know when taking out a loan
All banks talk about loans. We believe that a loan is an important decision, and when it comes to that, it can come with a lot of questions and stiff terms that sometimes raise a lot of questions.
Below is an organised and clear list of essential terms that may arise in the lending process.
Type of interest
Fixed or variable, it's up to you :)
First of all, let's clarify what the interest is like. What you have to keep in mind is that it represents that percentage of the total contracted loan that you give back along with the rate of the credit product. And as you have found out so far, it can be of 2 types, namely:
Fixed interest rate
It comes with a very important advantage, namely: safety. When you opt for a fixed interest rate, you will know exactly, throughout the loan period, how much is the monthly installment. However, this has a price: as a rule, the fixed interest rate is higher than the variable interest when you sign the contract.
Variable interest rate
This involves a slightly higher degree of risk, as you won't know exactly what your monthly rate will be; as the name suggests, interest can vary depending on the movement of benchmarks.
If you want to compare them, you have to bear in mind that, historically, interest rates have been on a downward trend and, not infrequently, fixed interest rates have proved much more expensive than variable rates.
Or how to collect all your expenses in one place
Surely, you have heard very many times about it, whether it has grown or decreased. In case you haven't found out by now what it actually is, find out that it's short for the Annual Effective Interest Rate
You find it as a percentage and it represents the total cost of a loan. It's often used in trying to compare two credits. It can often be useful, but it is good to understand in more detail the following factors that influence its value:
What are the costs included in the APR by each bank?
Some banks choose not to include life insurance costs in the APR. Also, the management fees of the current accounts are usually not included in the APR, as are the real estate insurances brought under guarantee.
How costs are charged
As you know, some banks charge fees and charges when you borrow, while others charge them as you borrow. It's important for you to know how much money you should have when you take out a loan.
But let's better see an example:
At bank X, a loan may have an analysis fee of 300 lei and another commission of 5 lei per month, for a period of 60 months (in total 600 lei).
At bank Y, a loan can have an analysis fee of 600 lei and a 0 monthly administration fee.
In both cases, the amount payable is the same, 600 lei, but at the time of granting the loan from bank Y, you should have in your current account 600 lei, compared to only 300 lei for the one at bank X, i.e. the amount represented by the analysis fee.
Fees and Commissions
Some mathematical calculations? Let's make it simple.
For starters, keep in mind that banks charge a range of fees, and these are integral components of the loan product. Basically, it's a kind of cost of credit, and it can come in different forms. For example:
Most banks charge this fee as a one-off fee for processing the credit file, which is payable in full when the loan is granted. It's a good idea to have this money ready before you sign the loan.
Loan management fee
It can be charged annually or monthly. Some banks choose to calculate it as a percentage of the loan balance, and others opt for a fixed value throughout the loan period.
Current account management fee
It appears in the case of the purchase of a loan, being the amount you give the bank for the service provided, i.e. the creation and management of the account throughout the loan period. It is usually fixed and charged monthly.
Registration fee for the electronic archive
It is a fixed fee of 65.7 lei and is payable by each newcomer to the archive when the credit is granted.
It is paid in full when granting the loan and may vary depending on the type of real estate evaluated.
Tip: It's good to know that in most cases, appraisal costs for apartments are lower than for houses or land.
Costs of compulsory insurance for real estate guarantees
All real estates brought under guarantee for a loan must hold the PAD policy + optional policy. The costs for these insurances vary depending on the value of the property and the quotation offered by the insurer.
As a rule, customers can choose to take out the policy under bancassurance (via the bank), or they can take out the two policies individually and present them to the unit (if they prefer another insurer than the one proposed by the bank).
The costs with the PAD policy are 20 euros per year and are fixed. It is important to note that the optional policy is not found in the DAE calculations in most of the offers, because its value may vary.
Now that you know what each fee means, hopefully it will be easier to ask the bank advisor who will guide you when you apply for credit. And when you sign the credit agreement, you'll know what you're signing. :)
A very natural thing to do
When discussing higher value loan products, such as home or consumer loans, banks will often provide you with a variety of life insurance. And this is as normal as it gets, it's always good to have a plan B.
For this very reason, most common insurances are offered with loans to provide a safety net for you and your family. In other words, insurance covers risks such as death, disability and unemployment.
Depending on the bank you choose or your preferred insurance, remember that they can be optional or compulsory. They can also vary depending on a number of factors, so before signing up, it's best to find out all the advantages and disadvantages they entail. This is very important for you and your financial resources, as the way insurance varies can influence the amount you pay each month.
For example, at BT, in the case of a personal loan with life insurance, the insurance premium is paid in full when the loan is granted, either from your own resources or from the amount of the loan granted.
In the case of loans taken from other banks, which charge the insurance on a monthly basis, you will have to bear every month a certain cost, in addition to the installment related to the loan.
It's not that complicated to choose a loan, but you definitely need to be well informed beforehand. The important thing is that, in the end, the decision you make is the best one for you.