Loan rate calculation
In order to finance their purchases of goods and services, consumers have the option of using consumer credit. This payment facility is granted by specialized establishments present on the physical market (bank with a storefront) or on the Internet.
These loans are granted under certain conditions by the lending institutions, in particular the solvency of the borrower. Indeed, to validate the credit request of the latter, various elements will be verified by the lender. The borrower's income will be required of him, he should preferably justify a permanent job (CDI) and a stable situation. Thanks to all of its data, the lender will calculate the debt ratio of the credit applicant. In general, this rate must be less than 33% for the loan to be granted. This rate makes it possible to verify the share of household expenses over all of its income. This rate is not always enough. The “remainder” to live must also be sufficient. This is the portion of income that remains with the borrower after all of their charges have been deducted. The lower the household income, the more this “remaining to live” will be limited. Thus, households with very low incomes may have insufficient “remaining to live” to allow them to manage all of their expenses even though their debt ratio does not exceed 33%. The loan request may then be refused even though the rate of 33% has not been reached. The goal is to limit households in debt distress in United States and not to validate loan applications for people who could not repay their entire loan.
The borrower can himself calculate his debt ratio thanks to various sites on the Internet. Thus, in complete autonomy, he will be able to know where he is financially and whether he has the financial capacity to apply for a loan.
Once this element has been verified, the future borrower will be able to make his request. The amount of money he will borrow will be subject to an interest rate. In exchange for the amount loaned, the lender will receive remuneration from the borrower. This rate will allow him to know what exactly the loan costs him. For example, if he wishes to borrow the sum of $ 1,000 and it is subject to an interest rate of 4%, he will have to repay $ 1,040 (the $ 1,000 borrowed plus the $ 40 in interest). ). The cost of his loan is therefore $ 40.
The remuneration of the loan (the interest rate) is calculated according to various elements determined according to the request of the borrower.
Purpose of the loan
First, the interest rate will be determined by the nature of the loan. Indeed, a consumer can appeal to lending institutions to finance goods and services of different kinds. He will be able to finance the purchase of a car, embellishment work, a trip, a household appliance, etc.
Depending on the purpose, institutions will charge different rates depending on the risk involved. The purchase of a specific good such as a car is less risky for the lender than the financing of works for example. In an affected auto loan , the delivery of funds is directly linked to the delivery of the property. If the specified vehicle is not delivered or if the buyer does not take possession of it (does not correspond to his expectations for example), the sum of money will not be released by the lending institution. The suspension of credit to the property purchased reduces the risk. The interest rates charged for affected auto loans are therefore rather low compared to other rates. Conversely, certain types of credit are quite uncertain for the lender, in particular the work loan. In this context, a sum of money will be issued to allow the financing of works such as embellishments, extensions, etc. These situations can sometimes cause complications and create new unforeseen expenses. The borrowers must then repay the loan even though their work is not finished and they still have to finance it. In order to deal with situations such as the borrower could not repay his monthly payments, credit institutions prefer to apply higher interest rates in order to limit their loss in the event of non-payment or delay.
The borrower must therefore find out about the rates charged for the situation he wishes to finance and not expect to have equivalent rates according to the different goods or services financed.
Amount of the loan
The amount of the sum borrowed by the consumer will also determine the rate applied by the credit institution. Generally speaking, these establishments are free to charge the rates they wish. They are nevertheless obliged to respect the “wear rates”. These rates are published by the Bank of United States quarterly. In order to fix them, the Bank of United States collects different samples of the average rates charged by lending organizations in order to establish thresholds not to be exceeded.
Thus, as of October 1, 2016, the usury rate threshold for loans with an amount less than $ 3,000 is 20.01%. That is to say that if the borrower wishes to have available an amount less than $ 3,000, finance companies cannot offer him solutions with an interest rate greater than 20.01%.
For amounts loaned between $ 3,000 and $ 6,000, this rate may not be greater than 12.99%. And for amounts over $ 6,000, the threshold is 6.95%. Penal sanctions and prosecutions are provided for professionals who do not respect these rates.
Thus, depending on the amounts borrowed, the average rates vary. The higher the amount loaned, the less important they will be.
The interest rate of a loan is also calculated according to the duration of the loan and the amount of monthly repayment installments chosen by the borrower. Over the course of his simulations on the various websites, the consumer will be able to realize that the longer the repayment period (and therefore the lower the monthly payments), the higher the interest rate charged will be.
Indeed, credit institutions seek to reduce their risk in order to guarantee their remuneration. However, the longer the credit term, the greater the risk.
Over a long period of time, consumers are at much greater risk of finding themselves in financial failure and not being able to repay one or more of their monthly payments. He will be much more likely to have to face a job loss for example. He will also be able to see his personal situation evolve (marriage, birth, divorce, etc.). All of these situations are risky for lending organizations since they have a direct impact on the repayment of monthly payments. Because of this, they tend to increase the interest rate charged when the repayment term increases.
In order to mitigate certain risks, in particular the death of the borrower, credit institutions offer optional but recommended insurance. These insurances will allow the repayment of the loan in the event of death, serious illness or even loss of work. It should be remembered that in the event of death, the borrower's debt is passed on to his heirs who will be forced to repay a loan that they have not taken out. Serious illness or loss of employment does not suspend payment of monthly installments and the borrower is required to pay the amount owed. When these optional insurance policies are taken out, they take over for the repayments that the borrower cannot pay. Obviously, its insurance has a cost that must be added to the initial cost of credit. Lender institutions cannot require the subscription of such insurance (unlike real estate loans).
Thus the rate of the loan depends to a large extent on the risk incurred by the credit institutions. These risks are mainly linked to the purpose of the loan and to its duration. An affected auto loan whose repayments will be spread over a short period will have a more advantageous credit rate than a work loan whose repayment will be very slow. The consumer should therefore preferably want to finance a very specific good and determine in order to reduce the risks.
Some brands now offer payment facilities linked to the purchase of such and such a good. The rates can be advantageous insofar as it is the purchase of the specific good which conditions the delivery of the funds. Moreover, the funds would not be paid directly to the buyer but to the seller. The consumer will then have to pay the various monthly payments in order to reimburse the sum advanced by the establishment.