What to look for when choosing a loan?
In the era of such wide access to various forms of financing and such high competition on the market of credit services, it is sometimes easy to get lost. How do you know which loan will be the cheapest, since every ad convinces that the offer of this or that bank is the best of all? Contrary to appearances, choosing the best loan is not difficult. You just need to know which elements to pay attention to.
You do not have experience with loans? Or maybe you already have a few paid off contracts, but this time you want to consciously approach the analysis of bank offers to choose the loan that is truly the cheapest?
If you care about the lowest contract cost, you have to pay attention to the following:
The commission on the payment of the loan is a one-off fee, charged by the bank in advance when transferring money to the borrower. The best offers are 0%. However, it is not worth assuming that every loan with a 0% commission is cheap. Its profitability can be assessed only after adding up all the costs that the borrower will be obliged to pay in connection with the loan agreement.
The system of repayment of installments
Interest is the basic cost of the loan, which is regularly added to each installment. The amount of interest that will apply in individual months depends on two factors:
- nominal interest rate set by the bank in the loan agreement,
- the method of repayment of installments (equal or decreasing).
Although the repayment of the majority of cash loans is based on equal installments, it is worth mentioning an alternative, cheaper option to settle the amount due, which are decreasing installments (popular in the case of mortgage loans).
When we choose equal installments, each month their amount remains the same. All because the proportions of the principal and interest portion of installments change every month. With the passage of time, the share of capital (or the amount we borrowed from the bank) increases in them, and the share of interest decreases. In short, at the beginning of the repayment period, we pay back to the bank mainly interest, and at the end mainly capital.
In the case of decreasing installments, each installment contains the same capital part, and with the debt default, the interest value decreases (interest is charged on ever lower amounts). If we took out a loan of PLN 1,000, which we will pay in 10 installments, each month we will return the bank for PLN 100 from borrowed funds + interest on the amount to be refunded.
Accounting for this system, in the end we will pay the bank less interest than in the case of equal installments, where we return the borrowed capital more slowly to the bank, so despite the identical duration of the contract interest is calculated in individual months on higher amounts of current debt.
So if you care about the lower cost of the loan, ask the bank if it makes the offer available in the system of decreasing installments. Remember, however, that the initial installments will be higher than those that will apply if you choose equal installments.
Fixed or variable interest
Nominal interest rate is given in loan agreements on an annual basis and consists of two elements:
- margin (it is a fixed part of the interest) and
- base rate (for most PLN loans it will be WIBIR 3M).
If the margin remains constant throughout the duration of the contract, the amount of the base rate changes in the periods it concerns. In the case of 3M WIBOR, the interest rate is for a 3-month period (hence the term “3M”), so it will be updated every quarter. This means that every three months the nominal interest rate of our loan may change, and thus we must be prepared to change the amount of subsequent installments.
If we do not want to expose ourselves to fluctuations in the amount of installments, we can opt for a loan with a fixed interest rate. Thanks to this option, regardless of the financial situation in the economic market and irrespective of changes in market rates, the interest rate on our loan will remain the same throughout or within its entire repayment period (eg in the case of mortgage loans the interest rate is only valid for the first 5-10 years of the contract duration) ). Unfortunately, for this privilege, you often have to pay extra – with a higher interest rate.
The bank may propose to the customer to purchase non-obligatory loan insurance, but it may also require the conclusion of a contract of the selected policy type under a specific credit offer. However, it is worth remembering that the client decides where and from whom to buy the right policy – he does not have to use the bank’s offer.
Usually with cash loans there are two basic types of insurance: in the event of death and loss of employment. Insurance premiums can be charged one time in advance for the entire duration of the policy agreement (in analogy to how the loan commission is charged) or added to the loan installments.
Some insurance offers are constructed in a way that combines both types of premium regulation, eg for the first year of loan repayment they are charged in advance in a one-off form, and after the expiry of 12 months subsequent premiums are added to installments.
When signing a loan agreement with insurance, it is worth making sure what the total insurance cost will be, because in many cases (especially offers with a 0% commission), the insurance premium may be the main cost for the borrower.