“0% commission!”, “2 months without installments!”, “Credit decision in 15 minutes!” – we are shouting for ads from banks offering cash loans. Which one to choose, since everyone assures that their product is the best? The answer is not easy and depends on many factors.
Let’s start with the fact that there is no “perfect” loan that meets the expectations of all borrowers at the same time. In each advertisement we find information that the presented data refer to a specific case, and the final conditions depend on the individual credit decision. The Bank undertakes it based on the amount of the liability, the proposed financing period, and also analyzing the creditworthiness and creditworthiness of the potential applicant.
Banks, when estimating credit risk, are always prepared for the worst case scenario. Credit analysts do not exclude situations where the borrower may refuse partial or even full repayment of the liability. The lower the risk, the lower the loan costs. Therefore, often the more attractive financing conditions can be counted on by the existing client of a financial institution, because the bank has an insight into the history of its ROR account, savings account or credit account. It would seem that it is not a big deal, but it is very valuable information from the point of view of a potential “donor of capital”.
New customers are checked more meticulously. For higher amounts, a statement of income is not enough, but a proof of earnings issued by the employer is necessary. The bank also checks the credit history of the potential client. Lack of credit history or information about untimely repayment of existing liabilities, have a negative impact on the cost of credit, and in extreme cases, result in refusal to grant a loan.
Retrodatabase credit history
Information on a person’s credit history is collected from the Bank Register System maintained by the Polish Bank Association and from the Credit Information Bureau. At Retrodatabase there is information about current loans and credits (including credit cards and account limits) taken in banks and Spółdzielcze Kasy Oszczędnościowo-Kredytowych. From the records of Retrodatabase, the financial institution learns how the debt service has been carried out from the moment of submitting the credit application until its full repayment. Data on the loan, which was repaid with troubles, are stored for up to 5 years from the time of its repayment.
The better the history in Retrodatabase, and hence the higher the score (the so-called scoring), the better the terms of the cash loan can be obtained. For those who regulate their liabilities fairly, it is advantageous to consent to the processing of information in Retrodatabase even after paying the liability. The lack of credit history has a negative impact on the assessment of the client’s creditworthiness. It is an “unknown case” for banks.
Verification of the BIG register
A separate issue is checking the potential borrower in the Economic Information Bureau’s registers, where there are information on debts to utilities suppliers (electricity, gas, water), telephone or television services and companies from many other industries. BIG cooperates with a huge number of entrepreneurs who enter their debtors into their registers and check potential contractors to reduce the risk of cooperation with unreliable persons.
The entry is removed only after the payment of the debt, and the information about this fact should be forwarded to the one who applied for entering the debtor in the register. Therefore, before submitting a loan application, it is worth checking your data in BIG, because the person visible in his registers is treated as insolvent or unreliable.
Creditworthiness is a completely different matter. For its definition, the lender compares the income of the loan seeker with his expenses. It is about all fixed expenses (eg rent, electricity, gas, telephone, television, car use costs), but also maintenance costs (eg food, clothing, etc.), which each bank estimates according to individual rules and incurred liabilities, i.e. loans. There are also limits on credit cards and the amount of debit limits in the account.
The condition for granting the loan is, of course, a surplus of income over the amount of the installment that the customer would repay by taking out the loan on the conditions requested (the amount of the loan and its repayment time). The more stable the source of the customer’s income is, the higher the surplus of earnings over the expenses is higher, the greater the chance for attractive loan terms. Before starting the effort for a cash loan, it is worth closing the unnecessary limits on the account or credit cards, or at least reducing their amount, in order to improve their creditworthiness.
Installments and credit holidays
Talking to a loan advisor, you can expect questions about the type of installments – fixed or decreasing, and with the proposal of “credit holidays”. In the case of fixed installments, the amount of the lender refunded each month is the same throughout the entire loan period. Declining installments is a situation when the first payments are high and then gradually decrease as the capital that remains to be repaid and from which interest is calculated. The first solution means an even burden on the home budget, and the second is certainly associated with greater sacrifices in the first period.
“Credit holidays” are sometimes advertised with the slogan “buy today, start paying back the New Year”. It sounds encouraging, especially when the loan repayment begins in a few weeks or months. It’s just that such a cash loan is more expensive. The interest due for the period in which the loan is not repaid is simply assigned to subsequent installments and can not be seen at all. There are also variants when the capital is later repaid, but the interest due is paid from the beginning of the loan period.
Cash loan – assessment of the bank’s offer
Efforts to start with a cash loan should begin by considering a number of factors – what installment can be repaid without ruining the home budget (this affects both the loan period and the maximum loan amount we can apply for) and how quickly we need money. When money is needed “for now”, you need to seek support in non-bank institutions or in those banks that provide loans on simplified terms. It should be remembered, however, that you can count on smaller amounts and generally on slightly worse conditions.
The basis for the assessment of the proposed loan is a meticulous analysis of its terms, or related costs. The regulations precisely specify that the bank should provide the potential borrower with, among others, interest rate, amount of margin, amount of insurance (if related to the loan), amount of the Actual Annual Interest Rate (APR) and the total amount to be repaid.
Not only interest
A low interest rate does not always mean the most attractive cash loan. The bank may reduce the interest rate, but instead apply a higher commission for granting the loan. In turn, a low commission may require the purchase of compulsory insurance (for example, for life, for job loss, total incapacity to work, etc.).
It happens that the bank offers attractive loan parameters provided that it uses other of its products, eg ROR account, credit card or account limit. It happens that these additional products in the first period of cooperation are free or run on promotional terms, but later it may turn out that the profitability of these solutions is highly debatable.
Actual Annual Interest Rate
A good tool to compare the attractiveness of a loan is the Actual Annual Interest Rate (APR), in which all costs related to the loan are included. The higher it is, the more expensive the loan is. Comparing the APRC makes sense only for loans with the same amount for the same period, as the price of money in a given period is also taken into account for its calculation. You can also compare the total amount of the loan, which is the sum we will have to pay to the bank.
When making all comparisons, one should remember about any costs that are not directly related to the loan, and therefore are not included in its price (it does not include the APRC or the total cost of the loan), but may be a condition for granting the loan on promotional terms, i.e. the mentioned costs keeping a ROR account, credit card or other banking products.