To finance certain acquisitions or to meet certain expenses, individuals resort to loans. They turn to banks or other financial institutions that provide credit. The repayment of these services is made in capital and interest. The latter are repaid according to a rate that can be fixed or variable. In addition, the rate posted by the financial institution may not take into account certain taxes or fees. What are the different rates for a personal loan? Here are some answers.
What do borrowing rate and annual percentage rate mean?
When you take out a loan, banks will display a percentage next to the amount you want to borrow. This rate is nothing more than the interest that will be applied to the capital you have borrowed. It is most often** annual**. It is on this basis that the amount of the repayment is calculated. In effect, every month, a portion of the capital is repaid along with the interest due. However, the conditions of a loan can vary. The interest rate can be fixed or variable. It can also depend on the remaining capital to be paid.
Indeed, the repayment of a loan is not only limited to the capital and the interests. It also takes into account elements such as
- the file fees
- brokerage or intermediary fees
- insurance and other types of mandatory guarantees
- bank fees
- other fees related to the evaluation of the guarantee.
All these elements added to the capital to be paid and the interest allow to determine the total amount to be repaid.
The rate that corresponds to this effective cost of credit is called the annual percentage rate of charge. It is also expressed as a percentage. However, the legislation has put in place a ceiling rate called usury rate. Thus, the APR cannot exceed this legal maximum. For example, a threshold of 10.16% is applied for loans between €3,000 and €6,000.
How to determine the rate of a personal loan?
The rate of a personal loan varies from one financial institution to another. Indeed, it takes into account the nominal rate for the interests. However, the lender is free to set the level of its rate as long as it respects the ceilings put in place by the regulators. Other elements, such as administrative fees and insurance, are also taken into account in determining the rate. Their amount varies from one lender to another. This is why online banks with fewer fees (agency fees, for example) manage to offer lower rates.
However, financial institutions with a greater capacity to raise funds also have an advantage in determining the rate of the personal loan. The cost of this “rent for money” determines the annual percentage rate. In addition, the method of repayment chosen by the customer also determines the rate of the loan. When the loan term is also shorter, the interest rate drops. The creditworthiness of the customer and the collateral offered also influence the loan rate. This is why some people use a relative as a guarantor.
What should I choose between a fixed and a variable rate?
A loan can be repaid over 3, 10 or 20 years. This duration, which can be longer or shorter, is called** the life of the credit**. If the interest rate remains the same throughout this period, it is called a fixed rate. If, on the other hand, the contract provides for the possibility of revising the rate during the repayment period, then it is called a variable rate. When the borrower wants to determine in advance the unchanging amount to be repaid, he chooses the fixed rate.
The advantage of the variable rate is that it can sometimes lower the amount of the repayment. This is a good choice when the initial interest rate is very high. Sometimes the variation of the rate is correlated to an index. This can be the inflation index, for example. Thus, when the economic situation is favourable, it is not in the client’s interest to choose the variable rate, because it is very likely to rise in the following years.
On the other hand, when the term of the loan is 5 years for example, it is possible to opt for a fixed rate for the first three years and a variable rate for the rest of the life of the loan. The borrower can also negotiate a cap on the variable rate. For example, the borrower can set a maximum interest rate increase of 1% or 2%.
On which sites can the rate for a personal loan be calculated?
The rate of a personal loan can be determined on the website of a financial institution or the website of a broker. All you have to do is enter the amount and the desired repayment period. Thus, an estimate is obtained. Users can also use a credit simulator to determine their rate. Platforms such as Meilleurtaux, Empruntis, Lesfurets or Lelynx allow to make these simulations. The user thus obtains a comparison of the rates applied by the various financial institutions. It is a good way to find the best offer.
It is important to understand the elements present in the credit contract. In addition, it is advisable to compare different rates before committing yourself.