Loans
Credit is just a tool. You decide whether to use something that lifts you up or something that ruins you. A loan used thoughtfully will increase your wealth, whereas a loan taken out recklessly will chain you. It’s like a hammer anyway: you can hit a nail with it, but you can also hit it on your hand.
Contents
- About loans in general
- Private loans
- Corporate loans
- Closing remarks
About loans in general
As I mentioned above, a loan is just a tool. Although it has been used since ancient times (you must have learned about the resulting debt slavery at the time), still few people use it consciously today.
Currently you can take out a loan from many directions. This can be literally everyone, from family help to the employer to financial institutions. Please note that it is no accident that a lot of financial professionals work on banking regulations.
Restrictions have been introduced to mitigate banking risks (and in this case credit risks). They protect you the same way! If your bank says “no” to a loan, especially if multiple banks reject it, please don’t go to a place where they will give you money at a higher interest rate.
This is because the bank sees the probability of repayment and sees that it is too much for you. This is not against you, the regulation has been given by many years of practical experience.
Most loans are taken out through a financial institution, and this is also the best known. As only financial institutions are subject to central bank regulation, and also for you this will be the safest form, so in the rest of the entry I mean a loan taken from a financial institution. Before you decide to take a loan, consider the following:
- determine how much credit you need, if possible, specify it as precisely as possible
- how much own resources you have at your disposal
- there are loans that are cheaper but have a longer disbursement time, so know what the deadline is for the product or service you want to buy
Currently, banks offer different schemes within the same category. To make an informed choice, compare them based on the following considerations:
- how much is the installment,
- fixed or variable interest rate,
- what is the rate of the total borrowing rate (APR),
- how long is the term
- are there any other costs or fees incurred.
What is the difference between a loan and a lease?
It causes a headache for many people to take out a property or buy a vehicle or other asset, then take out a loan or lease it.
Ownership difference
The basic difference between a loan and a lease is the right of ownership. In the case of a loan, you buy the given object, the right of ownership is yours, the bank only registers a mortgage on it. In the case of a lease, the object belongs to the financial institution, you just rent it. Then, at the end of the term, you can decide whether to buy it at residual value (which you haven’t paid in installments yet).
Difference in execution
The main difference is in non-payment. Since the lease is not (yet) yours, execution is much easier. In the case of a mortgage, the bank can also take the property, but there the procedure is much longer, so the bank’s risk is also higher. Therefore, mortgage loans finance a slightly lower amount compared to the lease. This is only a few %, but it also shows the differences in risk.
Similarity in use
Both forms (loan and lease) are suitable for dealing with liquidity problems. You have a free loan for a mortgage. Then you will not buy a new property, the existing one will remain yours in the same way, but it can be encumbered with a mortgage up to the part specified by the bank. The bank can then make this amount available to you and then repay it under normal conditions. In the case of a lease, this is a leaseback. You nominally sell and lease back an existing tangible asset to the leasing financial institution. The device doesn’t go anywhere, it just changes hands. You are free to use the sale price, ownership of the tangible asset may revert to you at the end of the lease. Please note that these last two options are not games. Neither the bank nor the leasing company will sell half of the property in case of non-payment, but will put out you from the whole thing. In the case of enforcement, the starting price is not the market value but the outstanding debt. (This could also mean the bank is selling a 20 million property for 8 million.)
Important concepts than credit
Co-debtor (the debtor’s partner)
Banks allow you to look beyond your own income when determining the amount of credit you can take out. You have the opportunity to involve other family members in the loan as debtors because of their higher income.
Guarantor
The guarantor’s income is also examined by the bank. It can be both a business and an individual. A common example in companies is that the family business of the company manager and the company owner also guarantees the private loans of the company manager. The guarantor can even be the state, helping you achieve some of your private or corporate goals.
The bank may also ask for a guarantor, in which case it typically assumes that the person will not be able to repay the loan on their own. If you provide a guarantee for a friend or relative, please note that in the event of default, the bank will automatically collect the installment from you, and the purchased item will remain the property of the debtor. If your acquaintance towards the bank failed, he will hardly pay to you. This would leave you with only civil litigation.
Interest period
Loans can be divided into 2 groups according to the interest period: fixed and floating rate loans. The interest rate of the loan affects the size of the repayment installment. The interest rate can only change at the end of the interest period or by amending the contract for a separate fee. Loans for which the interest rate is fixed, regardless of the change in the central bank base rate, are called fixed-rate loans. Those that may change at regular intervals are floating rate loans. The initial repayment installment of fixed rate loans is typically higher than that of floating rate loans due to greater security and predictability.
Grace period
During the grace period, the bank will only ask you for the interest on the outstanding principal debt. This used to be regular for combined loans (then you paid the capital either to the insurer or to the home savings fund). The grace period is always based on the individual decision of the bank, it is not automatically available on request.
Prepayment
The bank will give you the opportunity to reduce your outstanding debt with an additional payment in addition to the installment agreed under the contract. You can then choose to have the term shorter, but the monthly installment will remain, or the bank will divide the debt to the original length of the term and thus the installment will be reduced.
Loan collateral
Loans can basically be divided into two categories:
- Secured loan: in this case, the bank also requests real estate or high-value tangible assets
- Unsecured credit: only the bank examines the income
As it is currently (at least in Hungary) not possible to lend solely on real estate collateral, the coverage of the loans is provided by income (income of an individual or business) in all cases. The property can be valued as additional collateral and is suitable to increase the amount of credit that can be taken out as well as to reduce the APR.
For businesses, the bank takes into account industry specifics and also asks for the balance sheet and general ledger to see how the company has managed over the past at least 2 years.
much shorter period, 3-6 months.
The maximum burden on your income is also regulated in your interest. There are places where only the bank’s internal regulations prescribe the upper limit, but there are places where there is a law.
The law determines the chargeability of income with the following so-called Payment to Income rule (PTI).
(The following ratios comply with Hungarian regulations, but not all countries apply the debt brake.)
|
Income |
Housing loan Interest period |
General purpose loan Independent of interest period |
||
|
|
Under 5 years | Between 5-10 years | Over 10 years | |
| Under HUF 500,000 per month | 25% | 35% | 50% |
50% |
| Above HUF 500,000 per month | 30% | 40% | 60% |
60% |
It is not only the mortgage loan you want to take into account that is included in your income. It includes all your existing loans, and the credit line counts even if you’ve never used it. Either reduce your credit line to the minimum or give it back if the bank rejects your application due to exceeding the PTI limit.
The only case where some of your existing loans don’t matter is loan redemption. In this case, the bank bases itself on the situation after the disbursement of the loan and the replacement of the other loans.
Please note that you do not have to request a maximum from your bank approval. Measure to your own performance, set your monthly repayment installment and consider what you can spend on long-term loan repayments.
Repayment of the loan
In the case of revolving loans, repayment is always made from the money currently received, so the credit line is available again.
Annuity repayment and linear repayment are the most common examples of monthly repayment. In the case of individuals, the repayment is typically in the form of an annuity repayment.
For you, this means that you pay the same amount throughout, and within this, the ratio of interest and principal paid differs.
Please note that if you have chosen a non-fixed rate loan, in the event of a change in interest rates, your repayment rate will change accordingly.This is called interest rate risk..
For a business, repayment can also be linear repayment. In this case, the customer does not pay the same amount to the bank, but the same principal and interest on the remaining loan debt. The more principal you have repaid, the less interest there is on the remaining debt, so the installment of the repayment also decreases.
The APR values of the two repayment methods do not necessarily differ from each other, but for a company, linear repayment may be more appropriate.
After knowing the basics, you need to decide if you need credit, if you’re doing well with it.
Debt is debt. There is nothing to say about this. Or yet? A loan or borrowing can be good debt and can be bad debt. But what is the difference?
“The modern slave does not have chains, but credits.”
When is credit good and when is it not?
If credit increases your wealth or gives you some value from time to time, that’s good, if not, it’s bad. Swearing very badly, I could say that debt is good if you took something from a loan
- its expected future value is higher than the current one even if you take out the loan (ie you bought it cheaply and then sold it so much more that it is even worth taking the loan)
- or your cash flow is positive. (That is, you use more money for the house than what the loan takes).
A little help to decide wether to get into it.
Answer these questions and you will get closer to the answer:
Is it better to take out a loan, or is it a better idea to pay in cash?
At all, do you need that project, and if so, when, with how down payment?
Let’s look at a simpler example. Consider that you want to buy real estate, either as an individual or as a business, and then rent it out. The calculation will work in the same way for the purchase of machinery for a business or the purchase of a new site. However, understanding the real estate example, the different acquisition and maintenance costs will not confuse.
How much is the profit on your money?
CoC: Cash on Cash return is the money that the money invested brings.
Calculation: Annual pre-tax cash flow / total investment
Since the yield is determined in % / year, make sure that everything else (eg income, expenses) is also calculated on an annual basis!
According to basic logic:
Annual income (from real estate expenditure): 100 petas (or 100 whatever)
Annual expenditure (for maintenance, everything else): 10 petas
Total: 90 petas
Property purchase price: 500 petas
CoC: 90/500= 18%
So you get 18% of your money every year.
Basic logic if you have credit:
If you took out a loan with a 20% deductible, then you paid 100, the bank paid 400, suppose that the loan repayment e.g. 60, which is very steep, but let’s look at this.
Annual revenue: 100
Annual expenditure: 10
Loan repayment: 60
Total: 30
Because it only cost you 100 petas here, so
CoC = 30/100 = 30%
It’s worth everybody to buy real estate!
Before you get into it, let’s be a little more practical.
It is a practical example of making a profit on your own money
In relation to Budapest, a property of about 20-30 million forints can be rented for about 100.000-150.000 HUF / month + utilities per month.
Let’s see how the CoC develops if you finance on your own and the loan is 3%, 4%, 5%. (term 20 years) (I calculated HUF 120.000 per year for property maintenance, which I think can be friendly. This is 10.000 per month if a total renovation is required at regular intervals.)
Earnings on the debt mentioned in the example..
| 1.2 million HUF annual rental income | 1.8 million HUF annual rental income | ||||||
|---|---|---|---|---|---|---|---|
| Property value: HUF 20 million | Property value: HUF 25 million | Property value: HUF 30 million | Property value: HUF 20 million | Property value: HUF 25 million | Property value: HUF 30 million | ||
| Without loan | 5.40% | 4.32% | 3.60% | 8.40% | 6.72% | 5.60% | |
| 20% deductible | Loan interest: 3% | 0.11% | -5.29% | -8.89% | 15.11% | 6.71% | 1.11% |
| Loan interest: 4% | -2.43% | -7.83% | -11.43% | 12.57% | 4.17% | -1.43% | |
| Loan interest: 5% | -5.10% | -10.50% | -14.10% | 9.90% | 1.50% | -4.10% | |
| 30% deductible | Loan interest: 3% | 2.32% | -1.28% | -3.68% | 12.32% | 6.72% | 2.98% |
| Loan interest: 4% | 0.83% | -2.77% | -5.17% | 10.83% | 5.23% | 1.50% | |
| Loan interest: 5% | -0.70% | -4.30% | -6.70% | 9.28% | 3.68% | -0.06% | |
Many people go so far as to run after others, either in connection with real estate or when purchasing a machine. Many people do, it is a good idea! In theory, the credit comes out of it, then let’s jump into it!
If the loan is repaid e.g. 80.000, and the revenue is 100.000, – then we’re fine, it’s worth it. Yes, to the bank anyway. The extent of this is shown by the APR. But is it worth it to you?
Yeah, you see, pretty much the minus even in terms of net revenue!
Make an investment from loan?
If you invest in the above project, you can even cost yourself money by dealing with it and taking responsibility. Just jumping in because everyone is already talking about it can push you underwater.
Yeah, that’s already yours? No. It’s not. The owner is the bank. And the bank is guaranteed to win 3-4-5% with it for 20 years. There is a better deal than that.
You could say you repay all the capital every year. Yes, based on the formula above, you can calculate roughly how many years from now you would be winning too. Because I guarantee that what is -5 or -10% in the picture will not tip over next year. Even if you’re positive, it matters if you at least extract inflation or even get more on top of that.
And that’s not even included when a speck of dust gets into the machine: what if you can’t rent it just enough to pay off the loan and minimal maintenance.
Since it’s easy to plan what you need to do to have a decent return, I recommend the paper-and-pencil. Believe me, it’s cheaper to count on it.
Before you jump in to count, you don’t need to do math in the next section. There is not much chance of them falling into the category of good debt.
Examples of bad debt.
I mentioned above what a bad debt can be like. Which does not increase your wealth.. Typically such an example is
- the credit card,
- consumer credit (at 0% APR the cost is included in the purchase price),
- personal loans that flow out of your hand with a fairly high APR.
- poorly implemented loan redemption
If you walk in such shoes, it is advisable to find a way out of the loan as soon as possible. You can do this with regular prepayments, in which case, in addition to the monthly commitment you make, you always pay extra in principal, or you can ask for a loan redemption for an overall lower cost, and you repay this cheaper loan at lightning speed.
Now let’s see what it’s like when you don’t hit your hand with the hammer, but hammer the nail into place.
Examples of good debt.
Acquisition of production asset
Such as e.g. companies to purchase a productive asset. You take out the loan, you start producing with the asset. Loan repayments and other expenses (rough example) HUF 100.000 per month, income increase HUF 500.000.
So you can make money with it every day, thus you extract the credit and have plenty for further development as well. You could have chosen not to take out a loan at all, but to gather your own. You can do this if you have the opportunity, but in the example above, you would have lost revenue, gained market share, and by the time you could save the necessary money on machine 1, you would have replaced the loaned machine 2x.
Be careful to keep your loan portfolio healthy before it crashes on you. Even if your machine produces, in the event of a market downturn, you will not be able to sell the product and you will have to pay the loan.
Training, education
Another good example is when someone takes out a loan to further their own training. Although you will have to repay the loan, but if this increases your income (whether as an entrepreneur or employee), you will obviously get a return on your investment. This is because those with higher qualifications typically have lower unemployment rate and earn more money throughout their lives. Student credit, on the other hand, is a double-edged sword. If you use it to party while enjoying the beauties of student life, the bill will be very sore.
Real estate, if you are an expert
A third well-used option could be the property. If we don’t take the case discussed at the very beginning when you are buying property just because everyone is doing it.
If you understand real estate investing, you can get out of it well, but you can also do well with the loan even if you have paid HUF 150.000 for a rent so far and you will pay HUF 120.000 for the loan.
A car loan if you use it for work.
Good credit for you:
- if you produce with it, e.g. you deliver
- without it you would not be able to go to a customer because it would simply be impossible by public transport
- you go to work with it and so you don’t drive within the city for 40 hours a day (at least you have a job)
When it comes to car loans, be aware that it’s not good just because to have a car. Buying a car that is too high category for you on credit is already a category of bad credit. Even if you want that vehicle badly. Calculate what kind of car you can afford to get into the good credit category.
Private loans
Consumer loans
Consumer credit is a summary of loans for the purchase, repair of consumer goods and the use of services. In the case of consumer loans, the financial institution does not request real estate collateral for the loan, as in the case of mortgage loans. The debtor’s income and other assets (even time deposits) serve as collateral.
Be sure to pay attention the following when you take out a consumer loan.
There can be a big difference between the offers of banks that offer consumer loans, so it’s a good idea to compare them before saying yes to any of them.
Unlike mortgages, consumer loans are more expensive, which can impose a significant and unnecessary interest burden on you if you make a reckless purchase. A consumer loan is not for you to buy what your needs dictate, but you have no money for it.
Nothing forbids it and in spite of you can do it, by no means use a consumer loan to buy a gift that is high in value relative to your income (e.g. a Christmas gift) or to buy a car that is as expensive as you can not afford. This can easily push you into a spiral of credit, from which you will have a very hard time getting out of it. (Already if you succeed.)
Use credit responsibly.
Many people have the misconception that they will not take out a mortgage on their house. Although it can be much cheaper, but they are afraid that if they can not pay, the bank will take the house. Therefore, they prefer a consumer loan to keep their house safe. I have some bad news for them. If you do not pay this loan, the bank will take your house the same way. The only difference is that it is slower because it is sent to court. You are guaranteed to lose the lawsuit due to non-payment (i.e. breach of contract), so the bailiff will try to recover the debt on your high-value assets.
Types of consumer credit
In the following, please note that the principles are widely valid, but the limits of each loan product (maturity, interest rate) already reflect the current Hungarian regulations.
Personal loan
What is the personal loan?
A personal loan is usually a type of loan that can be applied for without real estate collateral and a guarantor, which you can apply for at a bank branch. If you apply together with a co-debtor, the bank will approve an even higher amount.
Use of the personal loan
You can typically use it for general purpose, so it can be used for anything without having to prove it to the bank. You can use it to cover an unexpected larger expense, but you can buy a car from it or even make up for the minimum capital needed to buy the property.
Amount of personal loan
The amount typically ranges from HUF 100.000 to HUF 5.000.000, but of course it is possible to deviate from this.
Term
The term of a personal loan is flexible, usually 12-72 months.
Costs
Its maximum APR may not exceed the value of the current central bank base rate increased by 24 percentage points.
Other information
It is disbursed in a lump sum, so you can use the requested and approved amount immediately after it. You repay this in equal monthly installments, called an annuity.
Possibilities of errors in personal loans
This type of loan is quickly available, but is typically expensive. Thus, it is a common mistake to use non-essential consumer goods or buy something in general. This is a mistake, because if you do not have the money to buy the given product at its own consumer price, you won’t have it when it is much more expensive, because of the interest.
Overdraft
What is an overdraft?
A type of loan related to a retail current account that serves as a cover for a temporary financial disruption.
Use of the overdraft
Its use is not tied to a purpose, so you can use it for anything.
Amount of the overdraft
The loan is secured by regular credits to your current account (eg wages and salaries), according to which the bank individually assesses the amount of the credit line, the maximum amount of which is typically 1-3 times the wage received on the account.
Term
The loan has no maturity, the bank usually reviews the credit line annually.
Costs
Overdrafts are extremely diverse in their condition, so the credit institution’s business rules and announcement provide the most accurate information.
What they have in common is that their maximum APRs cannot exceed the current central bank base rate increased by 39 percentage points.
Other information
You can pay up to the credit limit approved by the bank, so it only gives a limit until you use it. The advantage is that the bank does not charge interest on the unused amount, it can only charge an availability fee, handling fee, which is more favorable for you. Once you have paid the credit line, the bank will charge interest on the amount used.
If a payment is made to your bank account, it will automatically be used to repay the loan, so the loan will be available to you again immediately.
Possibilities of error if you require an overdraft:
A credit line that has never been used and forgotten.
After that, the bank diligently calculates the handling fee and also appears in the CCIS as if you had a loan. A person can be lent to the extent specified by law or the regulations of the given bank, your credit line reduces this possibility. It is often the case that the bank rejects an actually needed loan (eg home purchase loan) due to an unused credit line.
Regular depletion of the credit line
If your incoming income just replenishes the credit line to 0, you are living on the bank’s money. With the possible cessation or decline of your income, this poses serious problems. If you can’t even top it up to 0 when the payment arrives, you’re just scrolling through your debt in front of you. And the ever-increasing interest burden automatically draws the budget further and further even if you don’t spend a single penny from it.
Credit card
What is the credit card?
It works in a similar way to an overdraft. You can also apply for this type of credit at a bank branch (or a credit card for the purchase of goods in some stores). Here, too, you have a line of credit available to you at any time, and the amount repaid is available to you again.
The difference is that here the credit line is registered in a separate account, which you can use with a credit card assigned to it. Your repayment is not automatic, but requires a regular transfer.
Using the credit card
You can also use the credit card to buy goods and withdraw cash from ATMs. Keep in mind that basically credit card purchases are the main goal, so cash withdrawn from an ATM will bear interest from the date of withdrawal.
Amount of the credit card
The amount available through the credit card is set individually by the bank after processing the customer’s application according to the customer’s request and options. Typical rate is 50.000-1.000.000 HUF.
Term
Because it is tied to a credit card, the term of the loan also lasts until the credit card is renewed. This is usually 2-3 years, after which the card (and with it the credit) is renewed. If you do not wish to do so, you must notify the bank in writing no later than 60 days before the expiry date.
Costs
Similar to the current account credit line, their maximum APR may not exceed the current central bank base rate increased by 39 percentage points.
Other information
When using a credit card, the bank will provide you with the approved amount, which you must repay within 15 days of issuing the statement. In case of repayment during this period, the purchase of goods is interest-free, beyond the period the bank calculates default interest.
Possibility of error in case of the credit card:
Late payment
Credit card repayments are due by the 15th day after the statement is completed. If you read that you can use your bank money for up to 45 days free of charge and you use your credit card for the first time on the 20th of a given month, the clock will not start at on the 20th. Up to 45 days will come out if you use it on the 1st of a given month and money reaches your account by the 15th of the following month. Misinterpreting this can lead to delays, which will result in punitive interest.
Cash withdrawal costs
A credit card is typically created for a small purchase of goods. If you repay your used loan by the specified date, the bank will not charge interest on your purchases. The bank typically charges interest on the cash withdrawn from the credit card.
Commercial credit
What is the commercial credit
You can apply for this type of loan at the place of purchase, which can be available even for a relatively low income.
Use of commercial credit
It is usually available for high-value consumer durables.
Amount of commercial credit
The amount is the lower of the price of the item you want to buy and the loan approved by the bank.
Term
Its term varies from 6 to 36 months, depending on the conditions and the amount raised.
Costs
As also a bank is in the background here and this type of loan is closest to the credit card, it also applies to this type of loan that their maximum APR cannot exceed the current central bank base rate increased by 39 percentage points.
Other information
It is worth considering the listing carefully, even if it is advertised with 0% APR, as the cost of this is then included in the purchase price of the product.
Car loan
What is a car loan?
A car loan is a special, targeted consumer loan. If we look at it very strictly, it is a personal loan from the amount of which you can only buy a car.
Use of car loan
Purchase the selected vehicle.
Amount
The maximum amount of a car loan is regulated by law. In Hungary in the case of a HUF loan, this is a maximum of 75% of the value of the vehicle.
Term
The maximum term of a car loan is 84 months.
Costs
Accordingly, the maximum APR rate is the same as for a personal loan, so the central bank base rate is + 24%.
Other information
Before you buy a car on credit, compare the constructions of different maturities. There is not much difference in the repayment rates between a 48-month and a 72-month loan, but the interest burden repaid can be double.
Summary of consumer credit
| Consumer credit type | Commercial credit | Personal loan | Overdraft | Credit card | Car loan |
| Credit purpose | For high-value durable consumer goods | Usually a general purpose loan | General purpose | General purpose, but is typically used for the purchase of goods | To buy a car |
| Amount (usually) | 20.000,- Ft – 2.000.000,- Ft | 100.000,- Ft- 4.000.000,- Ft | 200.000,- Ft – 1.000.000 Ft | 50.000,- Ft – 1.000.000 Ft | Up to 75% of the value of the vehicle |
| Term | 6-36 months | 12-72 months | continuous term with review | 2-3 years | 6-84 months |
| Maximum APR | Central bank base rate + 39% | Central bank base rate + 24% | Central bank base rate + 39% | Central bank base rate + 39% | Central bank base rate + 24% |
| Place of application | Store | Bank branch | Bank branch | Bank branch | Bank branch or vehicle sales point |
| Coverage | income and purchased goods | income, co-debtor, guarantor | income on account | income | income, purchased car |
Mortgages
You need a mortgage loan if the capital you need is not available to you on your own and consumer loans are either not enough or too expensive to do so.
This loan type typically has a longer lead time, in extreme cases up to 2 months. Be sure to keep this in mind before making a payment obligation, for example, when buying a property.
In the case of a mortgage loan, the bank not only examines your income as collateral, but also registers a mortgage on the offered property. If you do not pay the loan according to the contract, the bank can sell the property according to the conditions described in the loan agreement.
Important information about your mortgage
Before we look at the main features of mortgages, there is some important information that you can use to your advantage in the long run.
Promotions, subsidies, offers
Compare the offers of banks, as even 0.1% can be a significant difference, given that mortgages are usually large amounts of loans.
It is not enough to use online calculators on the Internet. They are very good as a starting point, but there is no possibility of “fine-tuning” there. I am thinking here that:
- what is about you in CCIS
- do you use e.g. home insurance (therefore usually a discount)
- for your income situation, the online calculator searches based on the amount you enter, and banks show a difference in what income they accept and what they consider to be credits. (Do they accept the cafeteria or other income, do you have to receive the salary to their account, or do you just have to receive that much credit to the account even if you pick it up and then pay the same)
Interpretation of maturity bank offers.
You can reduce all your reimbursable costs by redeeming the loan or prepaying.
There are times when the bank offers to make the capital that has already been repaid available to you again. Note that for mortgages, the ratio of interest to principal repayment will be roughly the following:
Read the fine print carefully before placing an unnecessary burden on your neck based on a promise that sounds good.
Mortgage collateral
The income
Without proof of wage or other income acceptable to the bank, at this moment it is not possible to take out this type of loan with mortgage collateral registered on the property alone.
Make a budget for the post-loan period. Include in it all the costs that will be incurred then (so not just the repayment, but the insurance, overhead, etc.)
If, including the security parts, it means that it would take an unrealistically long time to repay the loan, then it means that the property you want to buy or anything you would spend the money on is too expensive for you.
The offered property
Banks decide individually whether to accept the property offered for a mortgage loan. A common feature of the property
- it must be marketable and in good condition
- must have a minimum turnover value, in Hungary it is around HUF 5 million
- it can be an empty plot, but it cannot be arable land with a Gold crown value
The bank determines the maximum loan amount based on the valuation. In the case of real estate housing loans, the rate can be up to 80% for private individuals, and 50% for free use loans. This can make a bank more stringent, not more permissive. This may be bad news for you when applying for a loan, but it also serves your safety. This is one of the barriers to over-lending.
This means for you that if you want to buy a property on a mortgage loan, the bank will give you a maximum of HUF 8 million for a 10 million property. This includes only the purchase price of the property, not the lawyer’s fee, renovation, equipment, etc.
Types of mortgages
The apartment is a purchase loan / renovation loan / construction loan
With this type of loan, the bank targets the use of the money. When buying an apartment, the bank transfers the amount paid to the bank account specified in the contract of sale countersigned by the lawyer, and the change in ownership is expected to be recorded by the land registry at least on the margins so that the bank does not terminate the contract at the very beginning.
Of course, this is not a high expectation. Sounds more complicated than what you do. This is because it is part of the normal process when buying a home.
When renovating or building real estate, the bank is waiting for a draft of the expected costs. Once approved, disbursements are usually made intermittently according to the progress of construction work.
General purpose loan
This is nothing more than a special personal loan backed by a mortgage. You can spend the money on anything, not investigated by the bank. It differs from personal loans in two parameters: its term can be up to 30 years, and the APR is much lower. You can get it much cheaper than personal loans.
Note that once your mortgage is registered on your own residential property, there will be no home loan yet. Not even if you actually spent on your apartment. Thus, you will not be entitled to any discount that the bank can give in addition to housing mortgages. (Whether it’s an interest rebate, a waiver of start-up fees, or even a prepayment rebate)
It also differs from a home loan in the maximum loan amount that can be given to the property. Here, the bank goes up to 50% of the turnover value.
Combined loans
It’s an existing concept, but don’t look for such a credit product today.
This type of mortgage was very popular at the time, it was also given for housing and general purpose use. Today, however, some are not dealt with by banks at all, and others are not business for you.
There were two types, a loan combined with an investment and a loan combined with a building savings fund. It was characteristic of both that until the maturity of the related product, you had to pay only the interest to the bank, you placed the capital elsewhere.
Loan combined with investment
The essence of the mortgage loan combined with the investment was that you took out the loan, paid the interest part of the installment to the bank, and placed the part of the capital in unit-linked insurance. By basic logic, the money of the bank would have worked for you in the money or capital market as long as you only pay interest for using the money. At the end of the term, the insurer repays and the rest is yours.
This option is not available at all, given that many banks have preferred high-security products from their own insurance companies. Thus, the extraction of the insurance’s APR could not be realized either. And with that, the customer lost his money numerically.
Loan combined with building savings fund
The loan combined with building savings followed a similar logic. You also paid only the interest to the bank, you received a 30% credit from the state (up to HUF 72,000 per year) for the amount paid to the building savings fund according to the rules of the time. Due to government support, you had to repay less money than with a traditional loan, so the loan became cheaper for you. Today, however, state support has ceased, and with it the legitimacy of this credit product.
Mortgage term
In the case of an individual, the age of the debtor and the co-debtor is the initial basis for the maximum term, but not more than 30 years. For a long time, the loan could last up to 65 years of age (until retirement), but today it is not uncommon for the bank to approve it until the age of 75.
There are many who want to take the repayment installment down because the bank only approves it under the PTI regulations. Please also consider your life expectancy at maturity before making a decision. If you are expected to retire by then, know that your income will decline. If you are unable to repay the loan from the declining income, the bank will take the property away under a lien registered on the property.
There are some correlations between maturity and your own costs that is useful to be known.
If you want guidance, use the calculator of the Hungarian National Bank., or you can use the loancalculator here on the Silver Moon’s page as well.
If you increase the term, the installment will decrease, but you will use the bank’s money for a longer period of time, so the total interest repaid will increase. The same is true backwards, if you reduce the term, your repayment installment will increase somewhat, but overall you will come out cheaper.
With current real estate prices, the need for tens of millions of loans is not uncommon, so the difference between different maturities can also be tens of millions. To put it bluntly, you can choose to buy a car at the bank with a lower installment at start-up, or by taking on a higher installment yourself.
The table below has been calculated for information purposes for a loan of 20 million, assuming an interest rate of 5% throughout. In parentheses you can see how many euros this would be at a rate of 300 euros / forint. (20 million forints are about 66.700 euros.)
| Term | 15 years (180 months) | 20 years (240 months) | 25 years (300 months) |
| Estimated amount to be repaid | 28.468.571,- Ft (94.895 Eur) | 31.677.875,- Ft (105.595 Eur) | 35.075.402,- Ft (116.918 Eur) |
| Estimated initial installment | 158.159,- Ft / month (527 Eur) | 131.991,- Ft / month (440 Eur) | 116.918,- Ft / month (390 Eur) |
| The total estimated cost of the loan | 8.468.571,- Ft (28.229 Eur) | 11.677.875,- Ft (38.926 Eur) | 15.075.402,- Ft (50.251 Eur) |
Corporate loans
For businesses, one of the main issues in liquidity planning is borrowing. Types of loans are similar to those of individuals.
Here also
- you can use secured and unsecured loans,
- you have a choice between credit and leasing
- targeted and general purpose loans are also available to you.
Benefits of corporate loans
- the size of the business can be increased: you can put a productive asset to work sooner
- a tool for liquidity management
- it does not result the division of business ownership (when you involve an investor you say that we really need this asset, here is X% of my business),
- interest can be deducted from the tax.
- short-term credit can help you get through cloudy times. The latter is already a gray zone, from cloudy times it can easily be a difficult time, and from it a spiral of credit. However, when used with common sense, e.g. it must be bridged that a large buyer will only pay late, it can work.
Disadvantages of corporate loans
Taking out a loan always involves risk. So if you are still a beginner, this path is not for you.
Corporate (or any) loans is strongly contraindicated in the following cases:
- Starting a business on credit: If you’re not experienced enough yet and you’re financing something with credit that you think is a good idea, but you’ve never done it, chances are you’re going to fall into that 90% with your credit and everything. If you also secured with real estate, it is an expensive tuition.
- With a corporate loan, you need to pay close attention to planning. I’ve seen in several places that as long as the bank gives credit and the legal options allow, the company is credited. I know that being an entrepreneur is a risk taker, you also either go with the market or fall behind. BUT! In the event of a possible market downturn, the bank will not ask, it will wait for the repayment even if you can allow yourself cold water.
In the case of corporate loans, the range of loans that can be used (including the conditions) also differs from bank to bank. The current loan that best suits your company depends on:
- the results achieved by the company so far
- the credit purposes
- the offered guarantees
- the range and extent of grants available
- the individual regulation of the bank
So we only run in broad lines to see what a company can choose from in general.
Types of corporate loans
Investment loans
A business may also need a loan for development that can no longer be solved with a revolving loan. This is usually claimed as an investment loan.
Usually, the purpose of the loan is to buy a machine or a site.
Here, the property offered can be the property of the business as well as the private property of the business owner.
Its turnaround time is relatively slow and its prepayment is not automatic.
Overdraft
A product designed to solve short-term liquidity problems that can be applied for relatively quickly and easily.
You can use it for anything, it is a general purpose loan, you only have to pay interest on the credit line used. Repayment is automatic, if money arrives in the account, the repayment will be made without request.
If you opt for an overdraft, it’s worth creating other reserves as well, as the loan is reviewed by the bank every year. If you haven’t closed a good year, the bank can either lower the frame or eliminate it. This will multiply your previous payment problems.
Leasing
It is usually worthwhile for businesses to think about leasing when buying a car. At the time of purchase, the tax advantage can be in favor of leasing within the current framework.
In leasing, you do not pay a loan, but rent, which is a service.
Lombard loan
If you have bank-acceptable savings as an individual, but your company needs money, then before you wash your private and corporate assets together, think of a Lombard loan. (If you still vote in favor of washing together: it makes the accountant nervous till screaming, and the tax office will invite you with open arms for a conversation where your blood pressure will not be low even without coffee)
In the case of a Lombard loan, the collateral is a low-risk investment owned by an individual (eg a bank time deposit), while the loan is given to the enterprise.
Working capital loan
An obvious option for business development. The purpose of the loan is to finance the company’s short- and / or long-term working capital needs. Accordingly, the working capital loan can be used to purchase raw materials, finance inventory management, and cover other operating expenses.
It can be matured within one year or more than a year. Flexible form of financing without special requirements.
As it has a wide range of uses, it can be retrieved in several installments.
Closing remarks
A bank is a financial enterprise with far more experience in the field of finance than the average customer. They will give credit if he sees that they will win. You already have to see if it’s worth it to you or if you’re just feeding the bank.
Credit is an option, not a gift. Always consider the expected benefits in mind and consider the risks. Before applying for a loan, either as an individual or as a company, plan ahead after borrowing not only for the best, but also for the optimal and worst case scenario.
Remember: credit is not a gift. You have to repay interest on time because the bank is not a social institution, so they won’t wait.