When a person goes to apply for a loan, what they are really requesting is a service that, like any other, is subject to a series of conditions and to a price, so it is essential to take into account the following aspects:
- Determination of necessary funds: When calculating the amount of the loan to request, it must be taken into account that the formalization of the loan may entail a series of expenses (commissions, notary and registration expenses, taxes, insurance, etc.). In addition, it is necessary to bear in mind the tax burden and expenses related to the good whose purchase is financed. Therefore, not only will be weighted the amount necessary to acquire the good or service, but these elements will also have to be considered.
- Maximum amount of credit facility that can be received: Usually, financial institutions, and especially in the case of granting mortgage loans, establish certain limits on the total amount they can lend.
- Term of the transaction: The term of a loan must be consistent with its purpose. Thus, a mortgage loan, in which the acquisition of the borrower’s main residence is financed, the term is long, given the economic effort that must be faced, and can generally range from 15 years to 30 years. On the other hand, in the case of personal loans, the repayment terms are much shorter.
However, the term should not exceed the borrower’s working life. That is, for example, if the borrower is 45 years old when the loan is formalized, the term should not exceed 20 years, so that upon arrival of retirement age the loan is fully amortized. The justification for this rule derives from the presumption that with the arrival of retirement, recurring income suffers a substantial decrease, which could make it difficult to meet the payment of amortization instalments.
In the case of personal loans, the repayment terms are much shorter. In this case, more than the age of the borrower, what is relevant will be the useful life of the asset acquired, since the term of the loan should not be greater than that of the latter.
- Form of capital repayment: The most common is repayment through instalments, that is, in periodic amounts. In general, in the case of individuals, these instalments are monthly. In the case of companies, instalments can be quarterly or semi-annual depending on the seasonality of income. The possibility of early repayment of the debt must also be considered in this transaction.
- Applicable interest rate: This is the price to pay for the financing received. The interest rate can be fixed for the entire life of the loan or variable, depending on how the reference agreed for this purpose evolves and that is revised each period agreed between the parties. Usually, the applicable interest rate is set as follows: It will be equal to the level of the interest rate taken as a reference plus a spread to cover operating costs of the institution, which is usually kept fixed during the life of the transaction.
- Resulting financial burden: When making a borrowing decision, it is equally important to know the amount of income that I can use each month to repay the loan. To make this decision, it is essential to know what is the financial burden (sum of capital that is amortized plus interest) that must be faced and on what dates.
- Repayment capacity: Refers to the ability of a person to meet with their income their ordinary spending needs (food, current household expenses, travel, etc.) and the financial burden of the loan. The quotient between financial burden and disposable income (after deducting necessary expenses and taxes from net income) represents the ability to repay.
- Collateral: It counteracts a change in the scenario compared to the one initially foreseen; this translates into greater risk coverage and, therefore, in better financial conditions for the debtor.
After these considerations to take into account in the analysis of borrowing decisions, the concept of loan can be defined as follows: A loan is a contract by virtue of which the financial institution (called lender or creditor) gives to the client (called borrower or debtor) a certain amount of money in exchange for its return within a certain period and according to agreed conditions, entailing the payment of the corresponding interest (and, eventually, that of certain commissions).
