What is the loan that is best for you?

By | May 4, 2021

loan

A loan is an instrument through which a financial institution makes available to the client a certain amount of money defined in a contract, with which the obligation to return the amount in a certain time is acquired.

The contract establishes the commissions and interests that the client must pay in exchange for receiving the loan. The amount of money borrowed is called the principal, the interest is the price you pay for the loan and the period of time to pay it back is the term.

Loan modalities

You can request a loan under two modalities: credit in installments or line of credit.

The credit in installments in a loan that will be paid in equal installments composed of principal and interest for the specified term.

The credit line consists of making available to the client a credit limit with which he can make disbursements that do not exceed it. The amounts disbursed will generate monthly interest until they are paid in full. When returning the funds, the client will have them available again to dispose of them while the credit line is in force.

The fixed or variable interest rate

When applying for a loan, the financial institution may offer you a fixed interest rate for a specified term or a variable rate, which, depending on the institution’s rate review frequency, can change at any time.

Which to choose? That will depend on many variables, for example, a 1-year loan with a fixed or variable rate is not the same as a 10-year loan under the same premises. Since it is working with an uncertain future.

In that sense, there are no right or wrong answers as to which is better. However, less risk is handled with the fixed rate, you know what to expect and plan based on it.

Our recommendation is the fixed-rate since it allows you to plan your money. Take into account that the variable is subject to realities that you cannot control and, although it is not something common, they can appear abrupt in the rates that can affect you with a result that you do not expect.

Guarantees allowed to apply for a loan

When granting a loan, the financial institution assumes the risk that the client does not comply with the obligation to pay it. Depending on the risk that the institution understands it is taking, it may require a guarantee that increases the probability of recovering the debt in the event of default by the client. The most common permitted guarantees are joint guarantor, vehicles, real estate, and certificates of deposit.

Joint guarantor

It is the person who jointly offers their assets or financial credit to support the obligation assumed by the debtor with the bank.

In other words, the guarantor is like the padlock that protects the house from thieves. Although it is not infallible, this is what allows the bank to have a backing in case of default of payment, since in this case, it will have to assume the debt as if it were it’s own.

A loan guaranteed by a deposit

A certificate of deposit or a savings account balance can serve as collateral for applying for a loan. These loans are granted based on the amount placed as collateral and an intermediation fee charges on the interest rate that is paid at that time for the deposit.

Let’s say you opened a certificate of deposit for which you are paid an annual interest rate of 6%. When applying for a loan with the guarantee deposit, the financial institution asks for an example 5% above the deposit rate, for a final rate of 11% for the loan.

Unless you are looking to build or improve your credit history, taking this type of loan is not recommended, since you are practically paying them to use your own money.

Closing costs

These are the fees charged by financial institutions for the administrative procedures involved to grant a loan, from the request to the disbursement of the same.

Legal expenses

These are the commissions charged by financial institutions for the legal procedures required to formalize a loan, such as external attorneys’ fees, the drafting of contracts, and the registration of collateral, among others.

Payment to the principal of a loan

It is the payment that you make different from the regular installment, which reduces the total amount of the debt you have, and therefore benefits you both in time, because you reduce it, and in money, because interest costs, in the long term, they would be minor.

Advance loan balance

It is simply paying the entire debt before the agreed term. This, although positive for you, is not for the financial institution, which is why they usually charge a commission for this concept.

Extraordinary installment

The annual fee for an amount greater than the regular fee. With this fee, the financial institution seeks to adjust the loan collection to the client’s income stream. If the client receives additional income at the end of the year due to royalties and bonuses, for example, the regular fee may be lower and with the extraordinary fee for a higher amount, take advantage of this income to pay the debt.

Life insurance

Insurance that covers the balance of the debt if the client dies, so that their relatives do not have to assume that commitment.

Unemployment insurance

Insurance that covers the payment of the loan installments for several months in case the client loses his job so that he does not have to assume the debt while searching for a new job.

Differences between personal, vehicle, and mortgage loan

The primary difference is in purpose and warranty. The vehicle loan specializes in acquiring that and requires that the vehicle remains as collateral. While the mortgage loan, although it does not require that the purpose be to buy a property, it does require that it be guaranteed by a property. As for personal loans, these can be obtained without collateral and cover a wider range of consumers, such as purchasing appliances, consolidating debt, educational expenses, travel, among others.

In the case of vehicle and mortgage loans, due to the guarantee they require, they offer more attractive conditions, such as lower interest rates and longer terms.

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