Key concepts to know and understand before signing a loan contract
There are many reasons to contract a personal loan and to be able to get the liquidity that is needed in order to face an expense. Whatever the reason, the important thing is to know well what a loan is, its operation and the keys to get the best loan in terms of cost and other conditions.
For this, there are at least five concepts on loans that should be known:
This is the Annual Equivalent Rate and reflects the real cost of the loan. The APR is expressed as a percentage and is decisive when comparing loans based on cost. The APR includes not only the price at which the bank lends the money, but also includes the expenses and commissions that the loan has. In this sense, whenever you want to compare loans, it is better to look at the APR and not only the TIN (Nominal Interest Rate) that only includes the loan price and not the other expenses.
It is the time that the holder of the loan has for the repayment of the loan. In general, personal loans do not usually have a repayment term of more than 8 or 10 years, although it is true that the loan amount influences here.
It is important to know that the longer the term, the more comfortable the monthly installments will be, but the more expensive the loan will be since more interest will be paid for having more money without being repaid.
It is advisable to establish a repayment term taking into account the fee that can be assumed each month based on income, being the best to return the loan in the shortest possible time.
It will be one of the aspects in which the entities fix their attention when evaluating the applicant. This is the percentage of income that will be used to pay the loan. The rest of the loans or credit operations that are already taken play here. In any case, it is recommended that the indebtedness rate or effort rate does not exceed 30% of income and in no case should it ever exceed 40%.
Not only do you have to pay attention to the interest rate that is applied to the loan, but to the rest of the expenses that can be incurred and that can make the loan more expensive. We talk about commissions, which we remember are agreed between the parties. The most common commissions are the opening ones, the one that is charged for formalizing the loan; that of partial or total early repayment, very important if you want to cancel the loan before maturity; and the delay commission, which may not exceed 2.5 times the legal interest of the money.
In personal loans the guarantee that the amount will be returned is as your name indicates personal. This means that, in the event of a default by the holder of the loan, both present and future assets will be used to pay the debt. While, in mortgage loans, the guarantee is the property in addition to the personal, in the personal are your present and future assets.
If there are guarantors and non-payment occurs, it will be the guarantors who respond to the payment of the debt also with their present and future assets until the amount due is paid.