Are you thinking of applying for financing soon, but don’t know how to identify which credit is most expensive? You already have some credit proposals in your possession, but you have doubts about how to evaluate the rates presented in the pre-contractual documents?
then know what you should analyze in each proposal to conclude which credit is more expensive or cheaper for you.
Also read: Housing credit: What to know before moving forward
Need several proposals to identify the most expensive credit
Regardless of the purpose of the credit, know that before formalizing your contract it is advisable to analyze various proposals. Those who do not compare and analyze credit proposals in detail often end up taking out more expensive credit.
As a rule, when it comes time to take out a loan, be it a personal credit or one mortgage loans to buy a house, your first option is to go to your bank.
However, it must not limit your options to your bank, no matter how long the business relationship. After all, nowadays, the market is increasingly competitive. And if you ignore the options that exist in other entities, you may not benefit from the best conditions and end up paying a higher amount for your credit.
Thus, it is best to have several proposals on the table. in the background, the more the better. Of course, the analysis process will be more complex. But if you know exactly what to look for, it will be easier to compare the conditions that each bank offers and choose the best solution for you.
4 factors to analyze that influence the final price of your credit
1. Interest rates
Depending on the type of credit you want to take out, there may be more or less interest rates associated with it. For example, there are several fees and interest that you can find on a home loan. And if your goal is to avoid taking out more expensive credit, it is essential that you understand the interest rates associated with your contract. That said, here’s a summary of the interest rates you should look at:
Rate that is determined taking into account credit risk and loan guarantees. O spread and the bank profit margin when granting a loan. Although it is an important indicator in housing credit to understand if you are facing a good proposal, there are other points to consider.
Also read: Is the credit with the lowest spread always the cheapest?
If you want to take out a home loan with a variable or mixed rate, it is important that you look at Euribor. Euribor is the most recurrent index in mortgage loans in Portugalbeing one of its components that will define the interest rate you will pay.
Euribor has several possible deadlines, but in Portugal the most common periods are the 6 or 12 months. For example, if your credit agreement has a 6-month Euribor, it means that the interest rate will be reviewed every 6 months.
Also read: How is Euribor calculated and what impact does it have on home loans?
Interest rate variable, mixed or fixed
Before contracting a home loan, you can choose whether you want your contract to have a variable rate (influenced by Euribor), mixed (fixed amount in the first years and variable according to Euribor in the remaining years) or fixed (value unchanged throughout the term of the contract).
Even with the rise in Euribor, the variable rate continues to have a lower value in relation to the values practiced at a fixed rate, at least at the beginning of the contract. However, this may change significantly throughout the contract and even equal or exceed the value of a fixed rate.
However, in addition to looking at the percentage values of these rates and understanding their impact on credit provision, since a higher percentage makes credit more expensive, there is another detail you should know. If one day you want to sell your property before the term of the contract ends, you will have to pay a early redemption fee.
But this refund does not have the same value in all types of contract. That is, the early repayment is higher if your credit agreement is with a fixed rate. In these situations the commission is 2%. In a contract with a variable rate, the commission on the capital to be repaid is 0.5%.
Also read: Fixed, variable or mixed rate. What to choose in housing credit?
TAN and TAE
Although there are other very important fees to analyze (we’ll talk about it later), if you want to understand if a loan is more expensive in terms of interest and commissions, there are two fees you can’t ignore. the first is the TAN, Nominal Annual Rate which shows the final value of your interest rate. For example, through TAN you can understand what the sum of the spread as the index used in your credit.
the second is the TAE, Effective Annual Rate. Through the TAE, you can understand the value of the TAN (which only shows the interest), but also the amounts of charges and commissions associated with your credit. However, please note that the TAE does not include the value of other products contracted or associated with your credit, such as insurance.
2. Contract term can also make credit more expensive
O contract term is a point that requires a lot of consideration. And this why? Because the term of a credit agreement greatly influences the final amount you will pay for your loan. This is because the more years it takes to pay off a credit, more interest will pay. However, if shorten the term of your contract of credit, the monthly installment will be higher.
In this respect, it is necessary to weigh on the scale if you want a lower credit installment or pay the least amount possible for your credit. A lower installment allows you to better manage your family budget, but it makes your credit more expensive. already one shorter credit term translates into a long term savings, but it can make your family budget more limited. And that’s why you need to do math and consider what your goals are.
Read also: Reduction of installment or term in housing credit: which is the best option?
If you are thinking of taking out a home loan, be aware that due to a Bank of Portugal recommendation there was a reduction in terms of new housing credit contracts. In other words, since April 2022, there have been new rules when defining the maximum term of a housing loan.
So, if you have less than 30 years and take out a mortgage, continues to benefit from the maximum term of 40 years. But if you have between 30 and 35 years old, the maximum recommended period down to 37 years. already if you have more than 35 yearsthe maximum term of your home loan agreement must not be older than 35 years.
3. Banking commissions and credit charges
Although the TAE demonstrates the value of bank charges and commissions, this is an analysis that may need some attention. After all, the credit agreements are associated with certain commissions and charges that often go unnoticed, but have a strong impact on the amount to be paid for a loan.
In the case of housing credit, there are evaluation committees, to study the process, among others. And in some banks, this type of charge can even exceed 1000 euros. So compare how much each bank charges in commissions.
However, do not forget that have to bear another type of charge. For example, for housing credit, you will have to pay the registration fee through the Casa Pronta service, and this service has the tabulated value of 700 euros.
In addition, you will have to pay stamp duty on your loan, which in most cases is 0.6% of the credit amount. Afterwards, you will also have to pay:
- Stamp duty: It applies to the purchase price of your home. But to determine the stamp duty amount, you first need to know the deed value of the house, and then apply to that amount the rate of 0.8%.
Also read: Buying a house: costs, documents and taxes you should count on
4. Associated products can make your credit more expensive
When reviewing credit proposals, don’t just focus on the rates, even if they are reduced. While most of the above rates show interest and fees, allowing you to weigh most of the pros and cons of credit proposals, do not include associated productsas is the case with mandatory home loan insurance.
If you think that the life insurance and multi-risk insurance represent a significant monthly expense, by relying solely on interest rates and commissions to choose a proposal, you may end up accepting more expensive credit. After all, if interest rates do not present very different values, the amount charged by insurance can be essential when choosing the best proposal.
In addition, banks often grant a spread lower when customers purchase other types of financial products, such as credit cards. In other words, the contracting of additional products with the bank entitles bonus on spread.
Do you have questions which is the most expensive credit? Focus on these indicators
If you are wondering how you can be sure which credit is the most expensive (and the cheapest), know that there are two indicators that will help you reach this conclusion. The first indicator is Global Effective Annual Rate, better known by its acronym APR. the second is the Total Amount Charged to ConsumerMTIC.
Therefore, it is necessary that you know the difference between the APR and the MTIC.
The Global Effective Annual Rate, APR, is an excellent indicator when comparing credit proposals. After all, this rate shows you the total cost of a credit, plus the charges you will have with contracted products or services. That is, this rate includes the value of your credit, interest, taxes, commissions, mandatory insurance and other charges associated with the credit agreement.
However, the APR does not include the calculation of possible charges due to default, notary fees or the early repayment fee.
If you do not know where to consult the APR in your proposals, be aware that it is indicated in the pre-contractual information. In mortgage loans, the APR appears in FINE, the European Standard Information Sheet, more specifically in the “Interest rate and other costs” section. But if you are comparing offers for a personal loan, you should consult the “Credit cost” section on Standardized Information Sheet, FIN.
So when you are looking at the various proposals, the APR will help you to understand which financial institution offers the best credit conditions. But since you will have an idea of this reality through a percentage, the real cost of your loan may not be noticeable. And in this situation, MTIC helps you to identify this cost.
As the name implies, the Total Amount Imputedthe Consumer will help you understand the total costs of your long-term credit. In other words, the MTIC is the indicator that allows the identification of the actual cost of each credit. Like the APR, the MTIC includes borrowed capital, plus interest, commissions, taxes, insurance and other expenses. The big difference is that MTIC shows you the actual amount you will pay, and the APR just the percentage value.
However, there are some factors to be aware of when analyzing the MTIC. For example, when you take out a loan with a fixed interest rate, currently, the MTIC is higher. And the same happens if the proposals have longer deadlines, because inevitably will pay more interest.
However, when you take out a loan with a variable interest rate, the MTIC will be subject to rate variations during the credit term. This means that the value of the MTIC may rise or fall during the term of the contract, given the variation in interest rates.
Also read: How to compare credit proposals and choose the best option for you?