The loan calculation
When a household wishes to finance a project whether it is a real estate purchase, the purchase of a vehicle, or any other property, if it does not have the necessary cash to carry out the project. project, it can call for a loan. If the value of the project is greater than € 3,000, the applicant will be forced to provide supporting documents to the lending institution. Before committing to a loan for many months, or years, the consumer must have all the information related to his credit. Thus, the legislator has put in place many obligations for credit professionals.
First of all, the lender must ensure that the borrower is solvent, i.e. on the one hand, that he is not on file for payment incidents, and on the other hand, that he has regular and sufficient income to repay the credit he wishes to obtain. Thus, to put all the chances on his side, a borrower has every interest in calculating his borrowing capacity himself. This indicator will in any case be calculated by the financial institution to which it will submit its loan request.
Calculation of borrowing capacity
To do so, the borrower will have to identify all of his income (salaries, contractual bonuses, allowances, etc.). However, he must take into account the fact that some of his income may not be taken into account by the financial institution (allowances, exceptional bonuses, etc.). Then, he will have to account for all of his debts with credit institutions. By making the ratio: (Debt / Income) x100, he will obtain his debt ratio. And finally, it will take 33% (33% being the maximum debt ratio commonly accepted), from which it will subtract its debt ratio. With the value obtained, he will be able to determine his borrowing capacity. For this, he will use the value obtained (a percentage) that he will multiply by his income, which will allow him to know the level of the maximum monthly payment that the lender can grant him.
A household with an income of € 4,500, which repays around € 300 in consumer loans per month, will be in debt at 6.6% ((300/4500) * 100). Its borrowing capacity will be 4,500 * (33% -6.6%), or € 1,188.
However, it must also take into account the fact that its estimate may be revised downward or upward by the banking institution, depending on its charges, its mode of budget management, etc.
To calculate the cost of its loan, the household relies on the APR. The APR is an actuarial rate, it allows to identify the effective cost of the loan. Whatever the credit, whether for consumption or real estate, professionals must clearly show the APR (Global Effective Annual Rate). By imposing this on financial institutions, the legislator wanted to allow households to have a comparison tool, in order to compare the cost of credit between the different institutions. Indeed, the APR is normalized. Thus, for all credit organizations, the APR naturally contains the interest rate applied to the loan. In addition, there are also all the determinable costs related to the establishment of the line of credit by the lender. These costs include: administration costs, management costs linked to the line of credit, etc.
The APR is also an instrument which makes it possible to ensure that the interest rate is lower than the usury rate defined by the Bank of United States.
Since insurance is not compulsory for consumer loans and mortgage loans, it is not taken into account in the calculation of the APR. Especially since the borrower is free to choose his insurance company. He can insure himself with the establishment which grants him the credit, or with another organization.
However, the insurer will express the cost of the insurance premium as a percentage over the entire term of the credit. So that the consumer has both the percentage and the amount of the monthly insurance premium.
Real estate loan
If it is a real estate project, the acquiring household will have to put together a much more complete loan file. On the basis of this loan file, the financial institution will do many calculations to determine the amount it can grant to the borrower, and the interest rate it will apply to him.
In addition to the debt ratio, the financial institution will also calculate the borrower's scoring, the rest to live ...
To determine the cost of the mortgage that it will grant to the household, the financial institution must study the loan file provided by the customer. Indeed, the level of the interest rate will be determined by the level of risk of the borrower. The less risk the file will present to the lender, the lower the interest rate applied to the borrower, and therefore the cost of credit too.
In addition to the level of risk, the lender takes into account the presence of a financial contribution for the realization of the real estate project. Indeed, a contribution is always well regarded by the banker. All these data enter into the scoring calculation by the bank. The financial institution has other criteria to calculate the household scoring. You should know that the scoring calculation is specific to each financial institution. Thus, each bank is free to weight the elements of the borrower's file as it sees fit.
When he knows the interest rate that will be applied, the borrower can calculate the cost of his loan. For this, he has many online simulators, he just has to insert: the amount of the loan, the interest rate, as well as the duration of the loan. With this information, the borrower will get the calculation of his loan, namely, the level of monthly payments, and the total cost of the loan. Some sites have a graph to allow the borrower to define for him the optimal duration of his loan. That is to say, the cost of the loan according to the duration of the loan and therefore the monthly payments.
The schedule must allow the household to have as much information as possible for each of the loan maturities. Thus, for each due date, the lender specifies the interest reimbursed, the capital reimbursed, the capital remaining due. If there were any other charges, they should appear in another column. Likewise, insurance can also be included in the loan schedule. If the borrower insures with the institution that provides the loan, then the insurance will necessarily appear in the schedule.
To carry out its project, the household can set up different types of devices, which will have an impact on the calculation of the loan. During a first purchase, if it is the purchase of the main residence, depending on its income, a household can obtain a zero rate loan (PTZ). The amount granted by this device depends on the price of the good to be financed, and on the zone in which the household wishes to acquire the good. With this device, the household has an interest-free loan for which it can obtain a deferred payment of up to 15 years.
In addition to his mortgage, and the 0 rate loan, he can also obtain a 1% employer loan. If he had subscribed to a PEL (Housing Savings Plan), he could benefit from a loan on favorable terms. In addition, it may happen that the borrower decides to set up two bank loans to carry out his project. For example, if he has to do renovation work on the property he is buying, he can take out a loan to buy the property, and another to finance the work.
With these different devices, over the total duration of the loan, the household would end up with a different monthly payment for each device, a separate schedule for each device ... Given the fact that for each loan, the amount financed is different, the rate interest and maturity are also.
With all these deadlines, calculating the cost of the loan and its monthly payments over the total term of the loan is more complicated for the household. Indeed, if the borrower was able to obtain his various loans, at certain periods, the repayment deadlines may seem too heavy to him, for example at the end of the deferred loan at rate 0. By smoothing his loans; the bank allows him to obtain constant maturities over the life of the loan. The borrower has every interest in ensuring that the smoothing of the loan is optimized to reduce the cost of the loan.
Finally, the schedule is really essential, because it brings together all the information related to the calculation of the loan. Especially since the borrower receives an updated schedule every month. Thus, when interest rates vary, the borrower who tries to renegotiate his rate can, using his updated schedule, quickly determine whether the terms offered to him are favorable or not.