The cost of credit

by Sharon Garcia

You can get credit from a bank or from a specialized credit company.

A credit creates reciprocal commitments in a contract. The lender undertakes not to claim the principal (the loan sum) in advance and the lender undertakes to repay the principal according to the agreed terms. In addition, in order to remunerate the bank for the service it renders (to make available, in a short time, a sum of money) the borrower must pay him interest.

A distinction is made between real estate credit and consumer credit: the rates and borrowing conditions are not the same in both cases, in particular because the guarantees taken by the banks are infinitely less important – or nonexistent – in the consumer credit, hence the higher cost.

The level of interest rates

The level of interest rates

Each bank is free to set the interest rate of the credit it grants in the limit of the rate of wear. The interest rate or nominal rate of credit is the rate used as a basis for calculating interest. This rate is expressed as a percentage and for a full year. It is the global effective rate ( APR ), also called APR (A for “annual”) that allows comparisons between different credit offers.

There is strong competition among banks, particularly in the credit sector. To attract customers – especially young people – banks offer very low rate loans. In recent years, because inflation was very low and key rates (set by central banks ) very low, credit rates, including real estate, have fallen considerably.

Mortgages: rates in the 2nd quarter of 2019

 

Average effective rate in Q2 2019

Wear rate applicable on July 1, 2019

Fixed rate loans under 10 years

2.04%

2.72%

Fixed rate loans from 10 years to less than 20 years

2.09%

2.79%

Fixed rate loans of 20 years and over

2.23%

2.97%

Floating rate loans

1.85%

2.47%

Relay loans

2.37%

3.16%

The average effective rate results, for each loan category, from the average TEG (total effective rate) observed during the quarter in question. In France, in order to protect borrowers, the law sets usury rates which are maximum rates that can be applied to the loan categories concerned. 

Consumer loans: consumer loan rates in Q2 2017

 

Average effective rate in the 2nd quarter of 2019

Wear rate applicable as of July 1, 2019

Less than $ 3,000

15.81%

21.08%

Between $ 3,000 and $ 6,000

9.37%

12.49%

Greater than $ 6,000

4.44%

5.92%

The total cost of credit

The total cost of credit

The total cost of credit is the “price” of credit. It is expressed in USD. It includes the total amount of interest, fees, insurance, etc. It adds to the borrowed capital.

The total cost is essential but it is not the only one, it is important to know the monthly payment to be refunded.

The borrower must be able to repay

The borrower must be able to repay

Credit is a very useful tool for financing projects. This is often the only way to buy a home. But do not go into debt too much. Banks are careful because an over-indebted client may not repay his loan and too many customer failures can lead to the bankruptcy of the bank itself. This is why, in France, the banks verify, when they grant a mortgage to a household, that the debt ratio does not exceed one third of its income. The household, meanwhile, before committing to a loan, must ensure that the monthly payment will be sustainable over the long term.

The longer the repayment period of a loan, the higher the total cost, even if the rate is the same. In fact, interest is calculated at each maturity on the outstanding capital. If the repayment rhythm is slow, with low monthly payments, the share of interest increases and increases the total cost.

In most loans, the monthly payment is fixed and includes a share of capital and a share of interest. In the first years of the loan, repayment is mainly interest and little capital, the situation is gradually reversed.

Over-indebtedness

Over-indebtedness

Over-indebtedness is the inability of a natural person to meet his or her borrowing costs or the payment of bills for current expenses (rent, electricity, heating, etc.).

In case of over-indebtedness, it is important to react quickly. It will be a matter of filing an over-indebtedness file with the Commission of over-indebtedness of Individuals of the departmental branch of the Ranco Bank.

Once the file has been accepted by the Commission, a solution, which seems to be the most adapted to the situation, is proposed. The goal is to help the individual overcome their financial difficulties over the long term while balancing the interests of the debtor and the creditors.

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