A loan is the provision of funds by one party (the creditor) for the benefit of the other party (the borrower) on the condition that the borrower returns the funds within the agreed period, together with a predetermined fee (interest). Interest is the amount of money you pay for the loan. It is usually determined as a percentage and is therefore calculated from the borrowed amount, the so-called principal. When applying for any loan, it is necessary to document your current income. The banks check this to make sure that you will be able to repay your debt.
Forms of loans
A mortgage is a type of loan in which real estate is used as a guaranty. Such real estate serves as collateral for the company that granted the loan. Simply put – if you don’t repay the borrowed money, you may lose this property. In the case of a mortgage, the repayment period can easily be more than 30 years.
You will probably need a mortgage to buy your own property. But be careful! When applying for a mortgage, you must have your financial capital – a certain amount of money which you will initially put into this mortgage from your savings. It is also important to realise that this is a loan in which you establish your property, and its value plays an important role, which must be determined by an expert, while the price for an expert opinion is one of the fees you need to think about.
A consumer loan is a debt owed to a bank or a non-banking company that has lent a monetary amount for predetermined interest and a defined period. It usually has higher interest rates than a mortgage and the maximum repayment period is up to 10 years.
When taking a loan, think about the trustworthiness of the institution from which you borrow money, as well as its conditions. Also, think about the following:
- the amount of the monthly instalment,
- the amount of the loan and the length of its repayment,
- the purpose for which the loan is to be used,
- loan repayment options,
- loan security options.
Important terms or things to watch out for
Fixation is a guaranteed period during which the interest on your mortgage will not change under any circumstances. If the bank offers a low-interest rate, always check the fixation length. In general, it is more advantageous to bet on stability and thus choose a slightly higher interest rate with a longer fixation. In the short term, it may seem that you will pay more, but in the end, you will save.
Always check whether the bank charges fees for services related to drawing up a contract, maintaining an account, etc. It is also necessary to check whether the bank charges early repayment fees.
Beware of forced purchases. A bank that provides a loan, especially a mortgage, usually offers the client various services (maintenance of a current account, insurance, etc.). By purchasing them, you can often improve the terms of the loan. However, always carefully calculate which service is worthwhile for you and which is not.
RPMN indicates the percentage of all costs associated with the loan (interest rate and fees, for example, for loan insurance) and, therefore, the actual mortgage cost. You can have a low-interest rate but spend a lot on expenses. Therefore, pay close attention to the shortcut RPMN!
LTV (loan-to-value) is the ratio of the loan amount to the value of the property, i.e. the financing percentage. This indicator has a fundamental influence on the amount of interest rate. If you take out a mortgage of 50% of the property’s value, you will have a lower interest rate than with a loan of 80%. So the higher the percentage and the smaller your financial base (capital), the more expensive the mortgage will be.