Credit agreement – loan parameters
When entering into any loan agreement, you usually have to pay the bank a commission. This fee is sometimes called a commission for examining a loan application, starting a loan or signing a contract. Depending on the type of financial product and the details of the offer, it is either a specific amount or the equivalent of a percentage of the loan.
In the case of cash or revolving loans, the amount of commission is predetermined and independent or dependent only to a small extent on the customer. Banks are already guided by different rules when granting mortgage loans. In their case, you have a real impact on the size of the fee, and sometimes you can even convince the bank not to collect a commission.
This parameter may depend on:
loan amount – with a larger loan, the bank may apply a lower commission due to higher interest earnings;
LTV, i.e. the ratio of the loan amount to the value of the property purchased on credit. Today, the maximum accepted LTV level is 80% or 90% (if own contribution insurance is purchased). The bank may agree that a loan with a lower LTV, for example not exceeding 50%, will be subject to a correspondingly lower commission – instead of 2% it is 1%;
scoring, i.e. assessing your creditworthiness. When you submit an application, the bank will compare your profile as a loan applicant with the profiles of customers who have already incurred commitments and systematically regulate them. The greater the similarity, the more points you get and the more likely you are to have a lower commission;
use other bank products or promotions. The reduced commission can be applied during the promotional period, or in a situation when you use the offer of a personal bill or credit card;
type and purpose of the purchased property. When buying a flat for rent or a luxury apartment, you can meet different credit terms than when you buy a “regular” house or flat for your own use;
financing period. It also happens that the bank makes the amount of commission dependent on the length of the period during which the loan is repaid.
Loan interest rate
As far as the cost side is concerned, the fragment devoted to interest on funds is one of the most important provisions of the loan agreement. He decides on the total costs of the liability as well as the amount of installments paid. In the case of a mortgage, cash or car loan, interest is accrued from the very beginning of the contract.
With a revolving loan you pay them only when you use the limit granted. Using a credit card – after exceeding the non-interest period of 50 days. Regardless of the loan product, its interest rate consists of the interest rate and bank margin.
Short-term loans usually have unchanged interest rate throughout the contract period, while in long-term liabilities it is variable and depends primarily on the level of interest rates.
As a rule, the bank’s margin is constant throughout the entire loan agreement, regardless of whether it is short-term or long-term loans. The exceptions usually apply to situations in which the borrower has not fulfilled certain contractual conditions. If you use the “promotional margin”, but for example you stop paying in installments, or opt out of an additional banking product, the lender may increase your margin. It also happens that the bank uses the increased value of this parameter for a certain period of time – for example, until the entry into the mortgage becomes valid for its benefit.
Possible changes in the loan interest rate are the effect of changes in the WIBOR reference rate, i.e. the interest rate at which Polish commercial banks borrow money from each other. If you take out a loan in euros, then the changes will depend on EURIBOR, and when in pounds – on LIBOR. Depending on the market situation and the construction of a given loan, the interest rate may change every 3 or 6 months. Obviously, an increase in the reference rate leads to an increase in the loan interest rate, while a decrease in the rate leads to a reduction in loan installments.
Loan repayment rules and dates
Each credit obligation has the fact that it must be repaid on time. The loan agreement specifies the terms and date of loan repayment, and most often also the amount of installments paid. A credit card or revolving loan does not impose specific amounts and payment dates, but involves regular payment of a set minimum debt amount. In the case of a mortgage, there is no such flexibility, but you can choose the type of installments – decreasing or equal.
The type of installments chosen determines the total cost of the liability, the amount of monthly charges, or the creditworthiness obtained. Since decreasing installments are high in the initial repayment period, and the bank calculates the capacity taking into account the amount of the first installment, in this case your application will be rated worse. On the other hand, from the beginning you pay back large parts of capital, which translates into lower total loan costs. Equal installments generally remain unchanged (except for changes due to changes in interest rates), which usually means higher total liability costs and higher creditworthiness.
The total cost of credit and APRC
The interest rate and commission are the two most important, but usually not the only costs of using the loan. Therefore, before concluding the contract, be sure to read the section devoted to all costs associated with the obligation, i.e. also those resulting from compulsory insurance, additional banking products, or inspection of the property carried out by the lender (in the case of a mortgage contract).
In the contract you will find the Actual Annual Interest Rate, i.e. a parameter that expresses the percentage of all costs associated with the loan. Based on the APRC value, you can easily compare a given offer with other offers and assess its actual profitability. In practice, due to various types of additional costs, this indicator shows the attractiveness of a given loan better than, for example, interest rates.
Early payment of the liability
If you inherit your assets or otherwise improve your financial condition, you can pay off any part or all of your loan. This law is given to you by the Consumer Credit Act. What’s more, when you decide to overpay the loan, you will not incur costs for the period of the contract, which was shortened. In the case of mortgage loans, and sometimes also other liabilities amounting to a larger amount, however, the bank charges a commission for early repayment of the loan. The maximum amount of such fee and the principles on which it is calculated are set out in the Consumer Credit Act.
The loan agreement may also contain a clause saying that you must inform the bank of your intention to overpay the loan before making a deposit. Importantly, the document may indicate that partial repayment will not automatically shorten the loan period. In such a case, an annex to the contract must be prepared, which sometimes involves an additional fee. The annexed amounts of loan installments also appear in the annex.