When a person wishes to borrow it is important to take into account his ability to borrow, the amount borrowed, the duration, the rate of the loan and the costs related to this loan. This loan financing is intended to enable households to acquire property or life projects by facilitating their payment, within the limits of their repayment potential fixed by a debt ratio.
What are the different types of bank loan?
When talking about borrowing, it is important to define three main concepts, namely:
- Depreciation which corresponds to the single refund of the sum borrowed;
- The interest that is fixed by the lending institution and which corresponds to its rate of remuneration;
- The annuity, which is the amortization at the end of the contractual period of the sum borrowed plus the sum of interest over the same period.
Two main categories of borrowings are then differentiated: undivided loans and bond loans.
1. Undivided loans.
This type of borrowing corresponds to loans made between two parties: a borrower and the institution that provides the loan. These loans are most often contracted by individuals and SMEs (Small and Medium Enterprises).
Among the undivided loans, it is possible to distinguish three categories according to the form that depreciation takes (ie repayment):
- With a refund in fine
When an amortization in fine, only interest is repaid each month, the entire amount borrowed will be returned at the end of the period defined at the signing of the loan. This type of loan is rarely used by individuals but is common for businesses. It allows to have more funds, without having to repay the capital. This reduces the interest of the business result.
- With classic or constant amortization (degressive monthly payments)
In this case, the monthly payments of the loan cover both part of the interest and part of the amount to be repaid to the lending organization. The share of interest decreases over time which will reduce the amount of monthly payments. The share of the repaid capital remains the same.
- With constant annuity
In this case, the amount of the annuity is constant and corresponds to a single repayment term. The amount of the annuity is fixed at the beginning of the loan and does not vary during the period during the loan. Over time, the amount of interest repaid will decrease while the sum of the borrowed capital will increase.
Other repayment solutions exist, however. Thus, in certain situations the lending institution authorizes a deferral of repayment. In this case, the repayment period is divided in two: a first period where only the interest is repaid and then a second period during which the principal is repaid over the fixed annuity period (usually it is monthly) with a degressive interest share.
For the borrower
Before signing a loan, an information sheet must be given to the borrower. This form must gather all the necessary information on credit, offers, costs, insurance. It is from this information sheet that the loan is written. This offer is in the case of a mortgage loan sent by post.
Following the analysis of the situation and needs, the contract must therefore include the following concepts to ensure the validity of the loan from the borrower:
- The identity and address of the lender;
- The type of loan;
- The total amount of the latter with the terms of repayment (a table of repayments must be provided, with the share of the capital and interest repaid at each monthly payment);
- The total cost of the fees;
- The indemnities to be paid in the event of non-reimbursement;
- The rights of the borrower with respect to the 14 calendar retraction period;
- The articles of the code of consumption corresponding to the type of loan subscribed;
- The right to obtain a copy of the loan offer;
- In the case of a credit assigned to the good or service financed by the credit.
The borrower has indeed a period of reflection and a right of withdrawal. In the case of a consumer credit, this period is 14 days following the signature of the contract. As stated in the paragraph on mortgage, a waiting period of 10 days is mandatory before accepting the offer made by the bank. This delay is called the reflection period. The contract is therefore signed only 11 days after receipt of the offer.
With regard to the cost of the credit, the APR must be clearly indicated on the advertisements and the loan agreement. This will allow the borrower to compare offers made by different agencies. Finally, to ensure transparency to the borrower, in addition to the APR, advertisements should include numerical examples to have a clear idea of a real cost of a loan. Advertisements must also include the phrase “A credit commits you and must be repaid.
Particular case of the mortgage loan for which the advertisement must specify the proposed duration and the total cost of the operation.
2. For the lender
Before imposing guarantees, the lender will have to make sure that the borrower is able to repay his debt, through a study of income, according to the quantity and quality of the latter. In addition, the lender can ask for guarantees, such as a bond or the mortgage, which makes it possible, if necessary to protect themselves and to have solutions when the borrower is not able to repay his debt.
In general, the financing body offers insurance to the borrower in the event that the borrower is no longer able to repay the loan. Insurance, although legally not compulsory, is made compulsory by banking institutions. It will therefore reassure the lender and protect the borrower. This insurance may be different depending on the loan taken out.
Nevertheless, the borrower is entitled, since the Lagarde law of September 1, 2010, to compete in institutions offering insurance contracts to compare offers. The only limit to this approach is that the insurance taken out must be identical to that proposed by the financier with regard to the guarantees it offers. It is important to mention that since October 2015, the lender has been obliged to provide borrowers with a sheet summarizing insurance offers, guarantees, costs, etc. The borrower must also find the mention stipulating his the right to purchase borrower insurance in another institution.
Finally, concerning the loans signed as of July 26, 2014, the borrower has the right under the Hamon law, to change insurance. The lending organization is entitled to refuse this change.
The borrower insurance is the most suitable solution to cover the maximum of cases. It insures the repayment of the loan during a loss of income such as the death of the borrower, loss of autonomy, disability, loss of a job … The amount of this insurance may vary according to different criteria like the duration of the loan or the age of the borrower. It is therefore very important for the latter to compare offers from different organizations.
-Employment loss insurance
This guarantee can be covered in case of dismissal. It is often contracted during a mortgage. It is intended for employees at the time of signing the loan agreement. In order to assert your rights, you will be asked to justify to your insurer (if necessary the body to which you have taken out insurance) the situation by presenting for example the employment contract, the letter of dismissal etc. Solutions will then be found based on the clauses in your contract. Any change or resumption of activity must be notified to your insurer.
The term disability refers to the concept of permanent incapacity, whether total or partial. As with the loss of his job, this change of situation must be declared to his insurer who will put in place the clauses provided for this purpose in the contract following receipt of a file containing the documents justifying this situation.
-Insurance work incapacity
Unlike disability, incapacity for work is temporary. The insured can no longer exercise his professional activity in a partial or total way. After finding by a doctor, the situation will be declared to the insurer who will receive the necessary measures after receiving the supporting documents. A waiting period may be applied in this case.
When death or a total loss of independence, several situations are possible: if the contract (loan and insurance) is made with a single person, in this case, the insurance will cover the full refund the loan from the bank.