Do you know the interest rates that apply when you sign a credit contract?

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What is an interest rate?

The interest rate of a loan sets the remuneration of the loaned capital, paid by the borrower to the lender. The rate and the terms of payment of this remuneration are fixed at the conclusion of the credit contract. This percentage considers the duration of the loan, the nature of the risks taken and the guarantees offered by the lender.

What is the purpose of interest rates?

The interests that will be used on a credit will allow the lender to cover himself against three events:

  • First, the cover of the solvency issues: In case of non-repayment of the credit. Even though the majority of contracts are honored, the zero risk does not exist and part of the interest rate will be used to compensate for that risk.
  • Then, the provider’s operating costs: For the payment of services provided by the lender to which you have committed yourself. These services will be the handling of your application, the analysis of your current and past situation, or the administrative activities.
  • Lastly, additional services like insurance that comes with the credit contract: You can link monthly payment insurance which will serve to cover you in case of involuntary unemployment, total incapacity of work or disability

What is the difference between nominal, real and effective interest rate?

When you sign a consumer credit contract, it is important to keep in mind that there are several types of interest rates. These rates will describe the annual percentage costs that a customer has to pay for the credit that a bank or credit institute grants him.

The first difference to be pointed is between the nominal rate and the real interest rate. The nominal interest rate refers to the rate as established at the time of the conclusion of the loan. It corresponds exclusively to the interest charges in percentage to be paid for the credit desired. Other charges such as processing fees or commissions are not considered. 

The second measures the interest charge that actually applies to the loan, taking into account price changes. It is used to determine the actual cost for the borrower.

As for the effective interest rate as an annual percentage, it designates the overall fees that must be paid for a given amount of credit. These fees are composed of the nominal interest rate, the processing fees and other possible costs such as the guarantee for insurance or the fees for opening and maintaining a payment account. It is thanks to this rate that the client will be able to compare the different offers between them.

What are the annuities during the repayment of the loan?

In general, a loan is never repaid in one go. The monthly payments are spread out over several periods during the year. For a complete control of your credit, it is important that you are informed about the existence of annuities. There are two types, a constant one and a variable one.

When we discuss a constant annuity, we have to associate four elements to it: 

  • Its periodicity, which corresponds to the time interval between two consecutive payments
  • Number of payments
  • Amount of each payment
  • Date of each payment

What is the difference between constant and variable annuities?

The annuity sequence is constant if the period does not change, otherwise, it will be variable. When the annuity is constant, the share of capital amortization increases while the share of interest decreases. As a result, it allows for an identical distribution of the loan burden and greater freedom in budget management.

The constant annuity is therefore the annual repayment of a loan with interest by a constant amount, which is calculated according to the interest rate and the duration of the loan.

When the annuity is variable, the part of the capital amortization remains the same each year but that of the interest decreases. Since the interest is calculated on the remaining amount due, the financial costs are more advantageous than with a constant annuity. Keep in mind that the payments are higher at the beginning

How to obtain an optimal interest rate?

Creditworthiness and honorability are two extremely important terms for the borrower. To maximize your bargaining power with your bank or broker, it is imperative to act on these two elements. How do you do this? 

  • Present your complete application and your financial situation with all the requested documents.
  • Keep the ZEK’s assessment in mind. When you apply, the lender will check with the ZEK, the central credit agency. The more applications you make, the bigger the chance to get a bad rating. As a result, avoid making multiple applications.
  • Honor your monthly payments. Late payments will also affect the ZEK. It could affect your bargaining power.

MultiCredit differs from traditional banks and unlocks special financial situations. With over 15,000 credit applications per year, we have extensive experience in consumer credit. We provide appropriate and relevant advice and guarantee the best rate to the borrower.

Do you have a project to finance? Contact one of our experts and make your request. It will be processed quickly, easily and with the best interest rates. 

MultiCredit, financing your projects.

The article was written by MultiCredit.


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