How to apply for a loan

It is a good idea to know what is involved in applying for a loan and what the main requirements to obtain one are.

People typically take out a loan to pay for something they can't afford to pay for outright. Often they don't have enough savings to buy a car, renovate the house or pay for a wedding or for studies. However, they can apply for a loan from their bank and pay it back gradually, without having to use the savings they have spent so many years accumulating.

Whatever the reason, when we go to a bank we should know precisely what amount of money we need and what our payment capacity is, since they are two important factors that the banking institution will take into account when deciding whether or not to grant us the loan.

Although what is normal, is that request the loan to the company where have our account of use usual. However, knew that BBVA offers a loan to non-customers without the need of open account? Enquiry more on the Loan Fast here.

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Important information when applying for a personal loan

In order to choose the best type of loan, you should take into account these three factors:

The capital you need

This is the amount of money you want to borrow. Most banking institutions offer loans from €1,000 or €1,500, and the financing limit depends largely on the profile of the loan applicant.

The interest we have to pay

This is the price of the money the bank lends, the amount charged by the bank for lending an amount of money and running the risk of default. It is represented as a percentage which is referred to as the APR and NIR. Let's take a quick look at these two concepts:

  • The acronym NIR refers to the Nominal Interest Rate, the price that the bank charges for lending us money. It is calculated on the basis of a percentage on the capital lent to the customer. This percentage is applied to the capital outstanding at any given time. The NIR does not include any fees the loan might have.
  • The APR is the equivalent Annual Percentage Rate and, just like the NIR, represents what the loan costs, but this time including the fees and other expenses that can be associated with the granting of the loan.

Therefore, when analyzing the interest rate of the loan and comparing between one bank and another, the APR is the figure you should pay attention to.

The repayment period

The third most important factor when applying for a loan is the period of time over which you are going to repay it - the repayment period. This period typically ranges from two to ten years, although these periods can vary from one bank to another.

Be careful when choosing the period over which you plan to repay the loan since, although a longer repayment period will make the monthly installments smaller, in the long run it will also mean you pay more in interest. A shorter repayment period, however, will increase the amount of your monthly installments but it will make your loan cheaper.

What does a bank look at when deciding whether to approve a loan?

When a banking institution lends money, it trusts our ability to repay the amount borrowed, including the interest. In other words, the bank runs a risk and needs to make sure that as customers, you are going to be able to repay the money you borrowed. This is why the main criteria when analyzing any loan application is your monthly income.

The most important thing is to have a regular source of income and for this income to be sufficient to enable you to pay the monthly installments. This is why the indebtedness coefficient or ratio is used, a percentage that ranges between 35% and 40%, above which it would not be safe to lend a certain amount of money to a customer. In other words, if the monthly installment we have to pay represents more than 35% or 40% of our monthly salary, the bank will not consider it safe to offer you a loan under those conditions.

In this situation, you would have to modify one of the aforementioned parameters in order for a loan to be approved. you could apply for less money, try to find a bank that charges a lower interest rate or opt for a longer repayment period.

While your income is the most important factor in determining whether a loan is granted, it is not the only point that banks take into account when studying a loan application. They also take into account the number of account holders that request the loan, as two salaries (or sources of income) offer a greater guarantee of repayment than just one.

Another key factor that can tip the balance in your favor is your credit score. If, over the course of your lifetime, you have repaid all your loans or credits on time, the bank will feel more confident in lending you funds. That said, you will not be eligible for a loan in any bank if you are on the bad debt register.

Finally, having assets to your name, such as a house or a vehicle, will be collateral when applying for a loan.

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The most common fees in loans

Besides any interest you pay on your loan, most financing products offered by banks have some associated fees. The most typical fees are the following:

  • Start-up fee: this is a small percentage of the total of the loan that is paid at the start.
  • Fee for early partial or full repayment: this consists of a percentage of the capital outstanding at the time the loan is cancelled.

When you plan to apply for a loan, you should know exactly what your payment capacity is, i.e., your capacity to successfully make the interest and principal payments on your debt. Based on this figure, you can start to explore different options and, just like with any decision, you should compare the various alternatives on offer.

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