Loan definition: What is it! A Loan is a form of financing that allows you to obtain money for any purchase need or for liquidity and, since it is not a loan aimed at the purchase of a specific good or service, the resulting liquidity can be spent in complete freedom, without any justification on the use of the financing. It is however a classic financial product of Consumer Credit. This definition correctly shifts the objective of the Personal Loan from the financing necessary for the purchase of goods or services specified at the time of the request for financing, to the provision of cash to meet generic liquidity needs.
General characteristics of Consumer Credit
The Personal Loan provides for the financing of a fixed amount, at a fixed interest rate, with costs defined in advance, repayable according to a plan for the reintegration of the financed money in constant and periodic instalments. Since the loan is not finalized, the parties involved in the operation are the Lender and the Applicant Consumer, and if the request for financing is accepted, the contract is concluded directly between these two counterparts, who are the only ones involved. The disbursement of the sum by the Lender Institute takes place directly in the hands of the requesting Consumer. With regard to the costs of the operation, the costs and commissions of a Personal Loan in general include: the costs of opening the file, those for the management of the financing and those for any insurance and / or taxes. Some of these costs are of a variable nature depending on the amount requested, others are of a fixed nature and will affect more if the amount requested is low, weighing less if spread on a higher amount requested.
Personal loan agreement
Is the agreement by which the general conditions are established according to which the Lender, grant a certain amount of money to a person, the Applicant, who undertakes to return it in a predetermined period of time by means of a form of installment payment. It is signed by both parties and is such an important stage of the Personal Loan that the way it is drawn up and what it must contain are provided for by specific regulations. Each of the parties, each for its own part, must, one precisely and transparently declare the actual conditions of its offer (the Bank or the Specified Finance Company), the other (the Applicant) must ratify the commitment to repay the loan in the manner provided for in the contract. When drawing up a Personal Loan Agreement, full compliance with the regulations is to protect the Lender, but mainly to protect the Applicant, who must be fully aware of the characteristics and onerousness of the loan that he is about to sign and the burden that he is taking on.
The elements that the law considers mandatory in the drafting of a Personal Loan Agreement are:
-the type of financing;
-the amount of the Personal Loan;
-the methods of financing;
-the number, amounts and due dates of the individual instalments;
-the Interest rate;
-the Global Annual Percentage Rate;
-the detail, expressed in a transparent manner, of the conditions that may lead to a modification of the APR;
-descriptions and amounts of charges excluded from the APR;
-any guarantees required;
Criteria for assessing applications for a Personal Loan
The various Lender Institutions have different approaches in assessing applications for Personal Loans, but essentially before disbursement some criteria specific to this type of financing are evaluated. First of all, the risk policy of each Institute is based on the experiences of disbursement of this type of financing. Credit scoring statistics help to keep risk below certain levels. Each assessment is closely linked to the level of personal or family income but also to the amount of the repayment instalment to be paid by the Applicant. Finally, great importance is given to the creditworthiness of the Applicant through which each Lender seeks to assess the level of risk associated with each request, often using the reports of the “Central Risks”, from which the credit history of the person who made the request for Personal Loan is examined in detail. It is worth remembering that this is not an assessment of the morality of any creditor, but a summary of the past credit history, relating to relations between the Applicant and the Lender Institutions with which he has had previous financial relations.
Choice of the various economic conditions
When choosing a Personal Loan, it is a good idea to evaluate the various offers by examining not only the amount of the instalment but also the overall costs, detailed in the budgets of each Lender, and often it is not easy to disentangle between the amount disbursed, interest, ancillary charges, initial costs or insurance costs. Two of the elements on which to pay more attention are: the Interest rate and the APR.
Annual nominal interest rate, is the interest rate on an annual basis, applied in financing operations by the Lender Institutions, which are obliged by law to declare it in the Financial Contracts. This is an interest rate, which indicates the percentage of the real cost that the Applicant has to meet in order to have the immediate availability of a sum of money, to be returned in a certain time interval (installment). Moreover, the Interest rate does not take into account the additional and ancillary charges connected with the financial operation itself.
The APR (annual percentage rate) represents, on an annual basis and as a percentage to two decimal places, the total amount of the Personal Loan. In addition to the interest rate, the APR also includes the overall costs of the transaction, which are borne by the borrower and usually at a value higher than the Interest rate. It is no coincidence that in the various promotional financing offers, the annual nominal interest rate is clearly identifiable, while the APR is in many cases given little visibility, while respecting the obligation to indicate it.
Our national legislation allows, under certain conditions, a certain discretion in the calculation of the APR. This opportunity offered to the Lender Institutions means that certain items of expenditure may or may not be included, for example, only any insurance costs, if optional, which may be excluded from the calculation of the Global Annual Percentage Rate.