Borrowing wisely – Loans

Credit and loan are banking services without which the economy would be inconceivable, however difficult it is to imagine now, in the wake of the anti-bank sentiment of recent years. At the same time, the 2008 economic crisis has shown that loans can carry great risks, especially if we do not foresee the risks we will take. However, credit is not a bad thing at all if we follow the following rules.

Consider the amount of income that will be lost from the family cash due to the repayment

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Once we have decided that we want to borrow, the first thing we need to do is consider the amount of income that will be lost from the family cash due to the repayment. It is a good decision to take out a loan if it does not jeopardize your family cashier during the chosen repayment period, that is, the less the monthly installment . And just as important is what we borrow. It is worth borrowing for a home purchase (this can be called good credit), but for a brand new sports car it may not be worth borrowing 10-20 million (also bad credit). It is healthy to have up to one third of your monthly income (including any other credit), but better still only 20 percent, so that you will be able to pay your installments in the event of an unexpected expense or loss of income.

Legislation has changed a lot in recent years, making current loans much safer and more predictable than they were before the crisis. Despite this, it is still almost impossible to find the best designs without professional help. This is because we have to compare the offers of at least 20 banks, and there are so many types of loans with dozens of discounts and combinations that if you go into your own bank or look at only 3 banks, it may not be easy for us we have chosen the most favorable and safest construction.
Therefore, it’s a good idea to use a credit calculator and stay informed for weeks before deciding. It is often said that in life, marriage, home buying and borrowing are the three choices (perhaps even the fourth car purchase) that affect our lives for years, and if we make the wrong choice, it will cost millions.

We generally do not like to deal with finance, although it would be good if at the basic level we would make a conscious decision or at least ask experts (and not salespeople who have been hitting an agent for a few months) who deal with it. The worst thing we can do is start borrowing without asking anybody, without being thoroughly informed, and without talking to knowledgeable people. When we buy an apartment, we usually look at it several times before we put down a deposit, we bring with us competent people from the insulation to check the house’s legal issues and talk to the common representative, and optimally we have gone to at least 20 apartments in person. Even if we buy a used car, we usually take it to our mechanic, check it out several times, go for a test drive, and even get official data from the central database – and, of course, the Internet or 200 cars and homes before we leave home.
Oddly enough, when making financial decisions, we allow ourselves to be persuaded by our own bank clerk or, at worst, inexperienced salespeople, and do not take the time to make a real decision. However, it’s only worth saving $ 10 a month in installments , which can bring nearly two and a half million to the kitchen with a 20-year loan (as a friend of mine has always said, you’ll never earn the same hourly wage as buying a car and borrowing for orientation).


What causes the differences between individual loans when competition is so high?

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Banks, like other service providers, are in constant competition for loan applicants. As one bank’s advertising states, credit is not a gift, but a business to the customer and the bank . It would seem simple for banks to compete with each other for the cheapest loans they would be profitable. In reality, however, the situation is much more complicated. There are large banks where the unit cost (per credit) is lower and can be afforded while smaller banks cannot go below a certain level. There are banks that are important for lending, so they are active in the market, while some are less . Some do not take into account that the prices of their products are easy to compare on the Internet, and some that specifically target the online community. So many people, so many banks, so many habits. But the bottom line is that loans will never be equally cheap for everyone, so we have a financial advantage over less conscious non-internet customers when we choose a really good loan with a credit, product comparison calculator.


When borrowing, we should generally try to keep the initial cost as low as possible and the installment down. They also have a direct effect on the APR and the total amount to be repaid. What we consider most important is how much money we pay the bank over the whole term (it is almost no matter what the name of the various costs is). There are the biggest differences between home loans, and for an average loan of 6 million, you can find an offer with a repayment period of 36,278 forints and a total of 9,034,688 forints, or one with a repayment of 51,196 for a total of 12,405,787. We can make millions with a good choice, but not just the cost, it is worth deciding how long we want the installment to be fixed (this is called the interest period – no interest rate on a loan can change with the central bank base rate during an interest period). Many people think that forint loans are no longer risky, because there is no exchange rate here, which can increase the repayment rate. This is true, but interest rate risk is still present on forint loans, so if the central bank base rate increases, sooner (depending on the length of the interest period) the installment payment will also change. So first you decide how long you want to fix the installment (it can be 3-5-10-20 years) and then choose the best construction. The longer the bank has to keep the installment payment fixed, the higher the interest rate, as it has to take extra risk with it. We recommend an interest period of at least 3 years.


The pitfalls of borrowing – this is how we get out of credit

The pitfalls of borrowing - this is how we get out of credit

Before you apply for a loan, let’s think about how much we need! Let’s also think about how much leverage we can get to buy the consumer product or real estate we want, and even think about whether we can get a “free” loan from our family or workplace because it can significantly reduce the loan amount.


In the same way, think about the time you want to pay off your loan. Smaller installment terms because the longer the repayment period, the better, but the one hand, after a certain time no longer give you the installment-reduction than have to pay more If, on the other hand still pay the loan was a good feeling the new first or second year after our car or apartment, but after a while we get used to it, it becomes natural and so the repayment of the loan is more and more detached from the original purpose of the loan , we see only the monthly payment. Ideal credit is therefore not only cheap, but is for the shortest period of time that we can safely take on.


If you already have a loan, but the installment is high

If you already have loans and multiply your monthly repayment, most banks can give you a maturity (unless you have borrowed it for the maximum term), but it’s a lot better to see if you can find it at your own bank or even at another bank to change your credit. This means that you are replacing your old bad credit with a cheaper loan , and because of a lower interest rate, your installment payment will be lower, or may remain the same, and your maturity may be reduced proportionately by years. Somehow it has never been a fashion in Hungary to buy a loan, even though it is easy to save millions on mortgages. When choosing a credit comparison site abroad, they only calculate for the first 5 years (of course, they take loans for maturities of 20-30 years) because they know that they will either redeem or change their credit within 5 years.
The most we can save by taking out a loan is to combine several of our loans and combine them into a real estate loan. They tend to have a 6-7 percent interest rate, so with debt settlement (the term used to blend several different types of loans), from credit card debt, overdrafts, personal loans, and commodity loans can be treated as a single loan and you’ll only have to pay off in one place. We have seen many cases where by combining 6-7 loans it was possible to save HUF 50,000 a month.
The worst thing we can do if we don’t look at what other banks are offering and just pay the installment without getting informed.

There are some terms that we do not know, but we may need to be aware of them in our decision.

The borrowing rate is the amount that we usually pay at an annual percentage rate on our outstanding loan installment. This is built into the monthly installment payment, so we have no need to deal with it, but be aware that in a monthly flat loan (ie foreign currency annuity loan) interest constitutes a significant portion of the installment payment and only the remainder of the monthly installment payment is repaid. the remaining debt of the borrowed amount, ie the capital debt . However, as each installment includes capital repayments, our debt is slowly but surely decreasing. However, this is far from a smooth, time-proportionate process .


Although we do not notice any of this due to equal installments, we are probably surprised if we ask our debt at half-term and find out that we owe the bank even 60-75%, even though we are half-term. Later, this process accelerates and at the end of the term we almost repay the capital.


As these are years, or decades, the bank cannot predict in advance how interest rates on loans will develop over time, as it depends on the financial markets, ultimately the financial position of a country and even the economic policy of its government. However, a bank may decide to take on the risks involved, so that the customer will be sure to pay the same installment over the entire term. While this may seem beneficial at first sight, it may cause additional expense if a fixed interest rate does not reduce our installment in a favorable money market environment (and, of course, the fact that we are saving on a floating rate product during a rate hike).


Floating rate loans are usually based on a specific interest rate (such as the central bank base rate or other money market public interest rates), and the bank assumes that interest rates remain constant only for interest periods . Typically, the interest period is a few months, but in the case of mortgages, it can range from 3 to 10 to 20 years, and if this period has elapsed since the end of the most recent interest period, the bank will recalculate our installment according to the new interest rate. Thus, the repayment installment may not only increase, but also decrease in the case of a variable rate loan. Therefore, floating rate products have interest rate risk , even in forint loans, which are thus only exempt from exchange rate risk , but not risk free .


The APR stands for the so-called total annual percentage rate of charge . APR is actually an indicator that is proportional to a certain amount of terms (same loan amount, maturity), including many of the cost of the loan. A loan is more favorable if the APR is lower, but the lowest APR does not guarantee the most favorable loan , so it is worth considering APR only as one (but important) feature of the loan. For home loans, the APR used in advertising is always published for a loan amount of $ 5 million and a maturity of 20 years at average customer pricing. Even if our situation is a little different, it is not enough to just look at THM.


Another important feature of a loan is what it has at its initial cost , which is what we have to pay (or what is deducted from the loan amount provided to us) in order to get the credit. Therefore, always consider the initial costs with the installment or APR!