How to choose a loan? What are the parameters to take into consideration in a complex and variegated reality like that of loans? Fixed or variable rate loan? The constant installment may seem the most trivial financial product, but in fact the request for a loan is anything but a simple undertaking.
Just carry out a simple online search to find lists of suggestions: lengthening the amortization plan to make the fulfillment of the obligation more sustainable involves a cost, very often underestimated. For this, it is good to follow a guide that collects all the useful information on how to choose a loan.
Choose a loan: 3 main indicators
The current legislation provides for the need to provide useful and transparent information that must accompany the offer of a loan.
There are 3 comparative indexes that must be clearly illustrated and without hidden costs: the TAN , the annual net rate, the APR , or the total annual effective rate, and the total amount due .
Precisely the APR is the main indicator to which the utmost attention must be paid when choosing a loan: it represents the real and precise data that indicates how much interest is paid on a loan.
To choose the best loan it is necessary to evaluate the economic convenience, taking into account the different needs.
Most loans offered on the market have a fixed annual nominal rate and a constant monthly payment : this means that the customer / debtor must pay the same monthly installment, composed of interest calculated on a fixed percentage, the so-called annual nominal rate and the repayment of the advanced capital amount.
What are the factors that affect the loan?
The elements that go to affect the determination of the monthly payment are: the amount of capital received on loan from the bank, the duration of the loan, the nominal annual rate, the interest rate, the fees and commissions to be paid and the premium insurance.
What we pay more attention to is the installment amount to be repaid each month to fulfill the subscribed obligation.
Thus, the first question that arises is precisely the sustainability of the loan compared to our monthly income. The best method to dilute the economic weight of the loan on our finances remains to lengthen the duration, lowering the amount of the monthly installment.
Paying attention only to the installment to pay is not enough! Very often, it does not include all the commissions to be paid to the intermediary. Very often, several lenders prefer to charge a separate commission, while others add a monthly item for expenses.
Spreading the installment over several months, extending the loan amortization plan, leads to an increase in the cost, which is often underestimated.
And then, what other important parameters need to be evaluated to understand if a loan is really cheap?
How does the APR and TAN work in a loan?
Let’s go back to the initial indicators, ie the amount due, the APR and the TAN . The latter is the percentage rate of the loan. This alone would be enough to ideally choose the best, but unfortunately the loans include other costs, commissions and the insurance policy premium.
Consequently, evaluating only the TAN is completely useless. The APR includes all the expenses, but it is not enough because the expenses are applied at the beginning of the loan, and in calculating the APR, they are divided over the whole duration.
So by increasing the duration the APR is reduced and the loan seems cheaper , but it is not! In reality, expenses increase, and this indicator becomes completely misleading in the evaluation of a loan.
Try to calculate the APR through a simple multiplication, without resorting to the software prepared online … as you will see: it is impossible! Too many times, expenses are not taken into consideration, such as, for example, the cost of collection of the single installment, ranging from 2 to 5 euros, or the insurance policy premium, optional, but strongly recommended.
The total amount due does not have any of the defects listed above: it includes the total amount of the sums to be repaid to the lender, or interest, capital and expenses. Its only defect is the lack of temporal structure of the flows: it does not consider the necessary time, the duration and the monthly amount.
- Debt consolidation loan
- Loan 500 euros
- Honor loan
- Loan without payroll
- Student loan
Useful tips for choosing a loan
At this point, we provide you with useful tips to evaluate the convenience of a loan:
- always check if the installment is sustainable for you;
- try to understand the amount of the total amount and its cost;
- check if there are other one-time expenses in addition to the repayment of the monthly installment,
- pay attention to collection costs, account statement and insurance policies,
- if possible, reduce the loan term to save some money.
Do you want to receive more information? Do you need a custom quote ?