How to Evaluate a Loan
How many financing offers do you receive each day?
Dozens of advertisements in mailboxes, calls from call centers and much more.
In case there was a need to request a loan, among the dozens of offers available on the market, are we really able to understand which one has the best conditions?
This short article is aimed at those who are unfamiliar with the “technical” terminology, which is why it is very often difficult to read the economic conditions and not be able to make the right choice for your needs.
What are the parameters to be considered for the correct evaluation of a loan?
When we are faced with several offers of financing, the first thing that must be evaluated is the total actual disbursement and not limited only to the evaluation of the monthly payment.
Clearly very often this is not a simple operation to do. The costs, depending on the type of financing, can be multiple (eg interests, commissions, preliminary costs, insurance, etc.) and it is therefore not easy to report them in a single item of expense.
Let’s see in detail which are the main elements that should be subject to evaluation before signing a loan contract:
In some cases, especially when we are in the presence of secured loans (see the fifth assignment), the subscription of insurance to protect and guarantee the financed amount is mandatory. These expenses can be directly deducted during the loan disbursement phase and must, therefore, be considered among the various expense items to be taken into consideration.
These fees represent the amount due to the credit institution against a financial service provided to a customer. It is therefore applied not only in the case of a loan.
TAN (Nominal Annual Rate)
The rate in question is the pure interest that is applied to the loan. It is represented as a percentage and does not take into account any additional charges in the loan itself.
By way of example: if we ask for a loan of 200 euros with a TAN of 10%, at the end of the loan we will have paid over 200 euros (principal) for an additional 20 euros. The total reimbursement will, therefore, be equal to 220 euros given by the sum of the principal amount + interest expense.
A cost item that often tends to be forgotten is that relating to the preliminary investigation expenses. These expenses represent the burden, overturned to the applicant of the loan, that the credit institution must “support” to evaluate the applicant’s documentation and determine its solvency.
Generally, these expenses are calculated as a percentage of the amount to be financed and the reimbursement methods may vary from institute to institute. In the presence of small amounts, it is possible that the reimbursement of expenses is present in the first installment of the loan, therefore greater than the subsequent ones. In other cases, it is possible that they are deducted directly in the loan disbursement phase.
APR (Global Effective Annual Rate)
The interest rate in question represents the actual cost that the customer must incur to obtain and repay a loan. For this reason, it is very often also called the synthetic cost index (ISC) and contains within it both the nominal interest rate (TAN) and all the ancillary expenses represented by the items previously seen in addition to stamps and taxes.
The APR, as well as the TAN, is expressed as a percentage and is the most important item to take into consideration in the case of evaluation and comparison of a loan.
As required by Community law, the APR is precisely that rate of interest that makes the sum of the credit granted to the customer equal, with the total sum that the customer will have to repay on expiry.
When evaluating a loan, the APR represents the best element of comparison, provided that we are in the presence of loans with identical characteristics in terms of duration and number of installments.
It must always be remembered that the APR :
- With the same amount requested, it decreases as the number of installments increases
- With the same installment, it decreases as the amount increases