Costs and expenses of the personal loan
How much does a loan cost?
To assess the real cost of a loan, in addition to considering the amount of the installment, it is necessary to analyze all the expense items; among the most important is certainly the APR which, representing the total cost of a loan, can be used to compare different proposals.
Warning! In order for the APR to be used as a valid comparison tool, the different proposals must be “calibrated” or must be of the same amount and of equal duration. Furthermore, for the same amount financed or duration, the APR is reduced respectively as the duration or the amount of the loan increases.
The elements to consider before signing a loan agreement are:
- APR (Global Effective Annual Rate)
It is a rate that expresses the total cost of the loan. Unlike the TAN, the APR includes the mandatory ancillary charges such as preliminary expenses, installment fees, mandatory insurance.
The calculation of the APR does not include optional insurance costs, as well as state stamps and taxes (or all expenses that are not imposed by the lender).
Often willingly the funding bodies impose the cost of one or more non-compulsory insurance policies including it in the installment amount (installment that will suffer only a slight increase, considering that a policy of $ 300 “spread” in 60 months involves an increase in the installment of only 5 USD, a 600 USD in 84 months determines an increase of about 7 USD!).
Therefore, while respecting the law, it is possible to advertise a relatively low APR by deducting the cost of an optional insurance policy which, if included in the installment amount, contributes in every way to increase the total cost of a loan!
- TAN (Nominal Annual Rate)
It is a “pure” rate used to calculate the interest net of all the expenses related to a financing practice (preliminary fees, installment fees, mandatory insurance, commissions to be paid to a possible intermediary, taxes); therefore, being always lower than the APR, it is inadvisable to use it to compare the different financing proposals.
affiliated resellers to “push” sales (cars, computers, etc.) through “apparently” less expensive loans. The interests, in fact, are not paid by the customer but by the retailer (or the financial company, or both). A TAN zero, however, generally corresponds to a high APR: the customer, even if he does not pay the interest, will have to return to the lender both the capital and all the expenses related to a financing procedure – preliminary expenses, practical management fees, commissions etc. – which however contribute to increasing the total cost of a loan!
- Preliminary charges
The preliminary investigation is the phase in which the bank or finance company opens the file and completes all the formalities necessary for the loan (including the evaluation of the request, see obtaining a loan). The preliminary costs contribute to increasing the APR and vary significantly according to the funding body: generally they represent 1% of the financed amount (in any case they hardly fall below 50-100 USD).
Please note Some financial companies ask for an advance payment by making the client sign a financing mandate. This expense is not part of the preliminary investigation costs, which are paid only in the case of a loan, but in the “consulting costs” that will be due in any case. Attention therefore, even those who cannot be financed (protested, “bad payers”, etc.) or who do not have the necessary requirements to obtain the loan will have to pay this “consulting fee” without obtaining any loan!
Therefore, it is advisable to pay close attention when expenses are requested in advance, remembering that an alarm bell could be a promise of “loans to all and in a short time”.
Warning! Even with a zero rate a high initial cost can be hidden! The preliminary costs must be paid immediately upon disbursement, therefore, in the event of early termination – regardless of whether or not a penalty is paid – such expenses will never be reimbursed. Finally, it can be useful to remember that requesting a loan via Internet allows (in most cases) to completely eliminate this expense.
- Early repayment charges
The consumer can always pay off the loan in advance, paying the remaining capital, interest and other charges accrued up to the time of extinction (default, preliminary inquiry, etc.), plus (if required by the contract) the early termination penalty which must remain within the limits set by law (currently 1% of the residual capital).
The customer always has the right to obtain in writing the advance settlement statement in which the total sum – to pay off the debt – and the amount of future interest that can be saved if it is extinguished at that time will be indicated.
Warning! It should be stressed that the majority of the interest is paid with the first installments of the loan (French depreciation), so the closer you get to maturity, the less interest you will save. Furthermore, the preliminary costs will never be reimbursed. Finally, consider that a loan with zero early redemption costs will allow us to save considerably if a competing bank or financial company proposes (in time) a product on more advantageous terms.
- Insurance costs
The banks or financial institutions can request, to guarantee the credit granted, the stipulation of one or more insurance policies: these are life or employment policies, with which the lender ensures the repayment of the capital in the event of insolvency due to premature death, temporary disability or permanent loss of employment.
Warning! Alongside compulsory policies, the financial institutions can “propose” optional policies (civil liability, health insurance, etc.) which, although not included in the calculation of the APR, contribute to increasing the total cost of a loan! Consider, in fact, that even a very expensive policy can result in a slight increase in the installment, if this cost is distributed over several years: for example. a policy of $ 300 “spread” in 60 months involves an increase in the installment of only $ 5 … a $ 600 in 84 months determines an increase of about $ 7!
- Installment payment fees
They are included in the calculation of the APR and represent bank commissions for the automatic debit service on current account (RID); in the event that the customer does not opt for this method of repayment he will still have to bear the costs for the postal payment slip (with the further disadvantage of the queues in the offices and the burden of having to remember each month).
Warning! Even in the event of reimbursement by RID it is a good rule to always check with the utmost attention that the installment has been duly paid by your bank and that the payment has been successful, otherwise the financial companies do not allow justifications and can very easily ” record “the delay with all the consequences that derive from it! (see delay or non-payment of an installment).
- Costs for sending an account statement
Based on the new legislative provisions on the subject of transparency, an annual statement is prepared which summarizes the position between client and financial.
Also in this case the cost of production and sending of an account statement will be borne by the consumer.
It is worth underlining once again that to compare various proposals and evaluate the real cost of a loan, it is not necessary to dwell only on the amount of the installment or on any promotional offers (see Zero Rate), but all the items must be analyzed very carefully of expense taking into consideration also the possibility of an anticipated extinction, if the market proposes more favorable conditions.