A personal loan is a contract by which the financial institution advances an amount of money (principal) to another person called the borrower, with the obligation to return the principal and also pay agreed interest and expenses derived from the operation.
Credit institutions offer infinity of personal loans, also called consumer loans, with different commercial names (car loans, vacation loans, wedding loans …), but with a few variations they are all practically the same.
To compare the large supply of consumer loans in the market, consider:
Type of interest.
Opening and cancellation fees (total or partial).
Repayment term (the time to repay the borrowed money).
Amount of the monthly fee (will be determined by the APR and the term).
Type of interest
The interest rate is the price that the financial institution will charge you for lending the money that you request. Before deciding, compare different offers, but do not look only at the nominal interest rate, but at the APR, (more accurate if you examine loans with the same repayment term). The APR is a somewhat complex calculation that includes the nominal interest rate and the commissions that may be applied to your loan, taking into account the term of the operation. It is a much more reliable indicator of the actual cost of the loan.
Some loans may have a low nominal interest rate, but many fees for other concepts (opening, cancellation, partial amortization, study …). If we add all the concepts, we can discover that a loan at 3% nominal interest is more expensive than another at 5%, but with less commissions, for example.
Whoever contracts a personal loan offers as collateral all their assets, present and future.
Personal loans differ from mortgage loans in the guarantee that the credit institution has in the event of a default. The person who contracts a personal loan offers as collateral all their assets, present and future, which, depending on the case, may be many or few. The holder of a mortgage loan offers, in addition to the personal guarantee, the mortgaged property itself, which will become the property of the bank in the event of default.
As a consequence of this greater risk on the part of banks and savings banks, personal loans tend to have a higher interest rate and a shorter repayment term than mortgage loans. In other words, they are more expensive and we have less time to return them. The amount borrowed is also much less than what can be received in a mortgage loan.
In any case, clients with high balances in accounts of the same entity and houses and other property owned will have a better chance of obtaining loans with more favorable conditions than those without much net worth.
Before granting you a loan, the credit institution will carry out a feasibility study to assess your ability to pay. This study is similar to drawing up your personal budget. Above all, it looks at your monthly income and payment commitments, as well as other outstanding debts, including credit card balances, to estimate if you will be able to pay the monthly loan installments without difficulties. The bank will also value your assets (real estate, investments, other bank accounts, etc.), which serves as a guarantee.
If the bank has doubts about your ability to pay or your credit history and does not consider your assets to be sufficient collateral, you will probably need to have a guarantor (another person who agrees to take over the debt if you do not pay) to be able to get a personal loan.
Documentation necessary to request a personal loan:
Budget or pro forma invoice for the product or service you want to purchase with the loan Proof of income (last payrolls for external workers and VAT declaration and payment of self-employed workers from Social Security for self-employed workers, last income statement)
Copy of the employment contract.
List of your assets at the time of requesting the loan (real estate, cars, investments, bank accounts, etc. – remember: the loan guarantee is all of your current and future assets)
Deed of the house or rental agreement.
Payment receipts (electricity, gas, telephone, rent, etc.).
Latest receipts for other loans, if any
Purpose, amount and term
The duration of a personal loan should be no longer than the life of the thing you are financing.
Regarding the term, a golden rule is that the duration of the loan should not be longer than the life of the thing you are paying. You do not want to continue paying fees for something that you have enjoyed for a long time and for objects that you have stopped using or that have fallen from old age. Therefore, it is not advisable to ask for long loans to finance vacations, parties, or weddings. Nor, for example, should a car loan have a repayment period that is longer than the useful life of the vehicle.
In the event of granting the loan, the credit institution must deliver a binding offer detailing all the conditions of the loan in writing. This offer is valid for 10 days, for you to study it carefully and compare it with other offers.
The loan amount, the term and the interest rate determine the monthly installment to pay. The longer the term, the lower the monthly fee, but the total cost will be higher because you will be paying interest for a longer time.
Whenever possible, avoid loans that charge high early termination fees.