Group loans to make it easier to choose
You can group loans in many ways. This is good for you, as it makes it easier for you to choose the one that works best for you.
What is a loan?
Before we dive into the grouping of loans, let’s look at what the term loan itself means.
In its simplest form, a loan is nothing more than when you borrow money from someone, which you obviously have to pay back. And interest is nothing more than the usage fee for that money.
Accordingly, you can get credit from many people, for example from:
- an individual
- businesses (even employers)
- the state or municipality
You usually get it in the form of a bank loan. Of course, this is also beneficial to you, after all, banks are supervised by the central bank, so they can’t do anything they want. Loans taken just from anywhere are not checked by anyone, at most when they have already crossed all the boundaries and somebody reported them.
To avoid getting into an awkward situation, first of all get to know better the type of loan you want to take out, and plan ahead with due care. Although there are several places, where the bank is bound by the constraints of the PIT regulation, you also need to be active in all types of loans to avoid your own over-lending. (Only your existing loans can be included in the PIT, not your other liabilities.)
If you still get a grain of sand in the machine or make the wrong choice and get into payment difficulties, you still have options.
Classification of loans by collateral
Behind these loans, you provide some kind of cover in addition to your salary. You then authorize the bank that if you do not pay the loan on time, they can sell the collateral offered or exercise the other rights offered as collateral. This may be a little scary for you, after all, we can talk about up to 20 years here, but of course this advantage is not one-sided.
Type of credit protection
Real estate collateral
The best known collateral for secured loans. You will then be offered one or more properties that are also acceptable to the bank for which a mortgage is being registered.
The most common example is a car loan. This is nothing more than a special type of personal loan from which you can only buy a car and is covered by the car you have purchased.
Deposit or securities coverage
In this case, although you would have enough capital to achieve your goal, it is invested in some form. Then the yield on the security is likely to be higher than what you pay on the loan, so it’s not worth terminating.
Another common case is when a loan is backed by a low-interest bank deposit instead of a security, when the manager (and usually the business owner in general) does not offer his private assets as a member loan to the company, but the corporate loan is backed by private capital.
A special loan security. Then an otherwise creditworthy person (or company) guarantees to the bank that if the debtor does not pay, he/it will automatically take over the repayment. Then only the repayment will be his/its, not the loan amount.
This can happen when, due to the income situation of the loan applicants, the bank is not convinced that they will be able to repay the loan, but also when the manager offers a guarantee from his own otherwise well-functioning company as a guarantee behind his private loan.
What do you get for a secured loan?
Of course, you don’t take that risk just because it’s good for the bank. In the case of a bank, the interest rate on a loan is not just determined by the expected return. Loans from customers with bad debts should also be produced. This, of course, is produced by those who pay fairly.
Since there is also material collateral behind a secured loan, if you are unable to repay your debt from your salary, the bank is expected to be with its money anyway. Not just in your case, but in everyone else. This reduces their risk, so they no longer price it (and the loan can be cheaper).
The advantage of a secured loan over an unsecured loan is:
- at a much lower interest rate
- you can get the loan for a longer term, plus
- the bank can also pay a much higher amount
This can be crucial for you where the question is whether the monthly installment of the capital you want to raise with interest will fit into your options along with everything.
You can currently get a personal loan at an interest rate of 8-10% or even higher, as opposed to a 3-4% interest rate on a home loan.
To make the difference visible:
The difference in interest rates and the difference in maturity also mean that you would repay a HUF 10 million loan in the case of a personal loan with a monthly installment of around HUF 200,000. As many people cannot afford this, the same amount can be reduced to up to HUF 40,000 with mortgage coverage.
These are the loans behind which you do not offer any collateral other than your salary. In other words, it also means that after you don’t repay at all, the bank can’t do much there and then. That is why they are offered at a slightly higher interest rate.
Of course, you don’t have to feel sorry for them, it will send your debt to be recovered based on your existing loan agreement, which in turn is a long and costly process.
Examples of such loans are:
- credit cards
- personal loans
Group loans by use
The bank checks the use of the loan amount after disbursement. Most common purpose loans:
- home loans (construction, renovation, purchase)
- investment loans
- loan taken out to finance working capital
General purpose loan
In this case, the bank will not ask for any proof of the use of the disbursed amount after the disbursement, so you can use it for anything. Since you can even go on holiday out of it, here the risk of the bank is a bit higher here, you will also see this in the interest rates on the general purpose loans. That is, you get a little more expensive.
You can also use overdraft instead of targeted loans if you either not able or don’t want to justify the use. Even then, the fact is that you get a slightly higher interest rate.
Most common general purpose loans:
- general purpose mortgage
- personal loan
- credit card
Group loans by repayment method
In the case of repayment of an annuity loan, the repayment rate is always the same until a possible interest rate change at the end of the interest period. In the case of a foreign currency loan, the amount of the repaid foreign currency will be the same, the amount expressed in domestic currency may differ. If an annuity loan taken out in domestic currency, you will pay exactly the same amounts, within which the ratio of the repaid principal to the interest is divided.
For mortgages, this is the most commonly used type of repayment.
In the case of a linear repayment, the principal repaid is the same each month. As the bank calculates the interest on the outstanding principal debt, it will become less and less due to the declining principal debt. Accordingly, the amount of your repayment will continue to decrease.
This type of repayment is most commonly used for corporate loans. Compared to an annuity loan, only the repayment schedule is different (more predictable for a business), the APR can be the same.
In the case of a revolving repayment, you can re-use the already repaid part of the capital, which is repaid automatically from the money coming to the account. An overdraft is typically a revolving loan.
Here, a distinction must be made as to why the deferral has been approved by the customer by the bank.
There may be a case where you got the money but you don’t start repaying yet, you just pay the interest, not the principal. An example is a bridging loan.
At that time, the loan was approved, but you will request the disbursement sometime later. You must indicate and justify this to the bank when applying for the loan.
Then since you didn’t even get a penny, it’s natural that you pay neither principal nor interest, just a commitment fee. The commitment fee is charged by the bank because it keeps the loan at your disposal. That is, you indicate at any time that the approved amount can be disbursed and used at any time during the period covered by the contract.
Group loans by duration
According to the term, the loans can be divided into 3 groups:
- short-term: loans with a term of 1-2 years,
- medium-term: loans with a maturity of 1.5 years,
- long-term: loans over 5 years.
The longer the time horizon, the more collateral a bank can ask for, as the risk is also higher. Thanks to the collateral offered, they can also disburse a larger amount, so in the case of long-term loans, we typically talk about housing or investment loans.
The loan has a predetermined term and requires a separate contract amendment to extend it. Their repayment is typically annuity or linear.
In the case of fixed-term loans, the amount repaid cannot be re-used.
Typically a type of loan approved for 1 year but renewable. An example of an indefinite loan is an overdraft.
For loans of indefinite duration, the repaid capital can be reused on a revolving basis.
Classification of loans by interest rate
Fixed rate loan
In the case of a fixed-rate loan, you will receive exactly the same interest until the end of the term, and thus in the case of a loan in domestic currency, you will receive the same installment. Accordingly, in the case of a fixed-rate loan, you will know how much you will have to pay in years from the moment you set the first installment.
Here, the price of the security will be paid by the bank to you.
Floating rate loan
In the case of a floating rate loan, there will also be a period when your repayment is fixed. The period for which a given rate of interest is used by the bank is the interest period. This can be from 3 months to over 10 years. Here, too, it is true that the price of the security will be paid by you. That is, you get a loan with a longer interest period a little more expensive.
If you look at the chart above, you can see that it is currently worth fixing your loan repayment for a longer period, as your reference rate is currently at a historic low. Thus, a slightly more expensive loan will also be cheap compared to a situation after a possible interest rate hike.
In the period after the end of the interest period the applied interest rate is compared to the reference interest rate (eg BUBOR or LIBOR), and the interest rate premium (ie the interest margin) can be changed by the bank.
In the latter case, only if the contract signed by you provides an opportunity to do so. As the rate of the interest surcharge is also subject to rules based on the fair-bank decision of several central banks. (for example the Hungarian central bank)
- Based on what criteria do you choose the right loan for you?
- How do you decide which type of loan to choose?
- How often do you review this decision?
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