Borrowing and interest rates
The loan: general definition
The loan is defined as an operation which involves a natural or legal person requesting from a lender, mainly a banking establishment, the provision of a sum of money at a variable or fixed interest rate and a duration determined. A loan takes the form of a contract between a lender and a borrower, who agrees to honor a financial debt.
If the loan and the bank credit both correspond to the transfer of a sum of money from the lender to the borrower on the condition of subsequent repayment at a given interest rate, the main difference is in the duration. on which the transaction is inscribed. This is because borrowing mainly refers to long-term financial debt, while bank credit is usually a medium and short-term operation. The loan is most commonly used to finance: the acquisition of real estate, the constitution of start-up capital in the case of a business, or the purchase of certain consumer products, such as a car or equipment.
The main elements of the loan
The two main types of borrowing are undivided borrowing, usually taken out by a single borrower from a single lender, and bond borrowing, which is the creation by a company of bonds for financing purposes. Thus, the undivided loan is most often taken out by individuals as well as SMEs, while the bond loan concerns exclusively large companies.
The undivided loan consists of the following three elements: amortization, interest and annuity, which the borrower agrees to pay when the financial debt is contracted. The amortization of the loan corresponds to the repayment of the borrowed capital, while the interest is the sum fixed by the interest rate and received by the lender as remuneration for the loan. Finally, the annuity is the cumulative amount of amortization and interest, and corresponds to an annual payment.
The conditions precedent to the loan application
Before contracting a loan, the borrower must take into account three major conditions in his file: income and financial stability, the debt ratio, and filing with the Bank of United States.
Income conditions for contracting a loan
Insofar as the loan constitutes a financial debt, banks are particularly attentive to the borrower's income. In the context of a mortgage, automobile or any other project of a large amount exceeding 3,000 US dollars, the majority of banking establishments require the borrower to guarantee a fixed income each month and linked to a stable professional situation. . Thus, the chances of receiving a loan agreement are higher if the borrower is able to present income from an indefinite contract or a position in the civil service. In addition, in the case of mortgage loans, banks also often ensure the financial stability of the borrower by asking them to provide the latest bank statements for the past months - usually the last three months.
The debt ratio of a loan
Likewise, banking establishments particularly examine the level of the borrower's income to define the debt ratio in the context of one or more financial debt. Before contracting a loan, the calculation of the debt ratio makes it possible to measure the borrower's capacity to easily repay all of his financial debts. In the context of a loan, the debt ratio is calculated as follows: Debt ratio = monthly financial charges for all loans contracted x 100 ÷ monthly disposable income. Banks and other lenders place the maximum debt ratio at nearly one-third, or 30% to 33%, of the borrower's disposable income. However, in addition to the borrower's income level, a good personal contribution is also an advantage for contracting a loan under better conditions.
Filing at the Bank of United States
On the other hand, in United States, another key element of a loan file is the lack of filing with the Bank of United States. There are two main types of files at the Bank of United States. On the one hand, the FCC file, or Central Check File, groups together cases of unpaid checks and abuse of bank card use. FCC registration makes it impossible to issue new checks as well as the withdrawal of the bank card. On the other hand, the FICP file, or Individual Credit Repayment Incident File, corresponds to delays or shortcomings in the repayment of loan and credit annuities. For a borrower, registration in the FICP file does not lead to an automatic sanction or a formal ban on taking out loans. However, such an informative record can still limit the possibilities for the borrower to have recourse to a financial debt.
Amortization of the loan
Once the loan is contracted, repayment is made by periodic installments. A loan is said to be amortized when these payments are composed of a part repaying the initial capital, and a part corresponding to the interest calculated on the capital remaining owed by the borrower. The amortization of a loan therefore corresponds to its repayment. Amortization is required to vary depending on the amount of the loan. For example, an automobile is generally amortized over five years, while a mortgage tends to be amortized over 15 to 20 years. The three main types of amortization of a loan are: constant amortization of capital, amortization with constant annuities and repayment in fine.
The constant amortization of the loan capital
The constant amortization of the capital of the loan, also called reimbursement at declining maturities, includes: a fixed part corresponding to the repayment of the capital and a part corresponding to the interest calculated in relation to the outstanding capital. The remaining capital decreases progressively as the annuities progress, as a consequence the interest, and therefore the total sum to be paid at each maturity, also decreases. This type of amortization is mainly intended for borrowers such as companies and local authorities, and does not concern individuals taking out a loan.
Depreciation with constant annuities
Amortization with constant annuities is the most common type of amortization used by retail borrowers. Also called progressive repayment of capital, this method of amortization consists of fixed-amount annuities. Once the loan is contracted, the borrower agrees to pay the lender the same amount at each maturity, until the end of the repayment. Thus, at the start of amortization, the part devoted to interest occupies a larger part of the amount paid at each maturity, then tends to gradually decrease while the part corresponding to the repayment of capital increases. The progressive amortization loan offers the borrower the comfort of easily organizing his annuities, to the extent that the same amount is paid by maturity, over the entire repayment period of the financial debt. In addition, amortization with constant annuities has the advantage of allowing the borrower to spread the financial effort associated with the loan over time.
The reimbursement in fine
Finally, repayment in fine implies that the borrower repays all the interest and principal of the loan at the end of it, with no intermediate maturity. During the term of the loan, the borrower pays the interest resulting from his loan, the amount of which remains unchanged. This type of repayment is mainly used in the case of real estate purchases for rental purposes, one of the advantages of this type of amortization being lower maturities than in the context of a loan whose capital must be amortized from the start. departure.
Borrowing and types of interest rates
In the context of a loan, the interest rate corresponds to the remuneration paid by the borrower to the lender, expressed as a percentage of the total amount. The duration of the loan as well as the nature of the risks incurred by the lender affect the percentage of the interest rate. The interest rate offered by the banking establishment to the borrower is calculated according to the Euribor, namely the interest rate at which banks lend each other. In terms of fluctuations in the interest rates of his loan, the borrower has the choice between three main types of rate: the fixed rate, the variable or adjustable rate, and the mixed rate.
Fixed rate loan
The fixed rate loan is a loan whose interest rate is the same from the beginning to the end of the term. As soon as the loan is offered, the borrower knows the interest rate, but also the total cost of the loan, the repayment period and the amount of maturities: this is the reason why this type of rate is considered as the safest. The fixed rate loan is also the one that tends to display the highest subscription price, because the bank undertakes to offer the same rate over the entire term even if the Euribor evolves.
The variable rate loan
The variable or reversible rate loan is a loan whose interest rate varies according to a benchmark determined when the loan is taken out. The borrower is therefore not able to know in advance the total cost of the loan because this cost is calculated based on the interest rate. While the benchmark index is most often Euribor, some banking institutions may use foreign currencies and other indices. The variable rate loan is therefore more risky than the fixed rate loan, however it also appears to be less expensive because the bank can adapt to changes in the Euribor by readjusting the interest rate if necessary. In addition, the variable rate is generally framed by a maximum ceiling rate, or cap, and a minimum floor rate, or floor, beyond which it cannot change.
Thus, the two most obvious advantages of the variable rate loan are a lower initial rate than that of a fixed rate loan on the one hand, and the possibility of further cuts in interest rates. These two advantages would prove useful in borrowing situations where there is both a large difference between the variable rate index and the fixed rate index, and high fixed rates, above 6%. However, the variable interest rate can still have an advantage in times of low fixed rates in the case of short-term transactions, with a duration of less than eight years, with a good starting rate varying little in the first three years. In this case, the borrower is a client who either does not need to borrow over a long period, or has the certainty of reselling his property quickly.
The mixed rate loan
Finally, the mixed rate loan presents a moderately risky and expensive solution, halfway between the fixed rate and the variable rate. Indeed, the interest rate can then be fixed the first years, then variable on the continuation of the loan. This type of rate is particularly attractive for the borrower if he plans to resell his property before the end of his loan, for example before the rate becomes variable.