What is personal credit and how does it work?
Personal credit is a financing agreement. That is, you request a specific amount of money from a credit institution and you will have to repay it through fixed installments over a certain period, according to the payment plan agreed between the parties.
The amount, term and reimbursement are defined at the outset. Bear in mind, however, that the amount to be requested in personal credit cannot be less than 200 euros, nor more than 75,000 euros.
What are the purposes associated with personal credit?
The purpose is the use you are going to give to the money you borrow. There may be a defined purpose, such as credit for vacations, home works, education, appliances, among other projects, but it can also be hired without a specific purpose.
The definition of the purpose for which the credit is intended, as well as the evidence thereof, is important when contracting the credit, as it will influence the setting of the maximum rate that institutions can apply to it.
What is the interest rate on a personal loan?
Whenever you are told about the interest rate on a loan, keep in mind that there are two interest rates – the Annual Nominal Interest Rate (TAN) and the Annual Global Effective Charge Rate (APR).
Nominal Annual Interest Rate (TAN)
THE TAN is associated only with credit interest costs. It can be fixed or variable.
Fixed-rate loans are the most common and, in these, the rate remains unchanged throughout the contract. On the contrary, in loans with a variable rate, the rate is revised periodically according to the term of the index (normally Euribor) to which the spread.
Annual Global Effective Charge Rate (APR)
Whenever you take out a loan, you will not only pay interest on the amount you borrowed, but you will also have to pay commissions and other charges associated with the loan.
All these costs are reflected in the Annual Global Effective Charge Rate (APR) that financial entities are obliged to publish. It is the rate you should look at whenever you take out a loan, as this represents the total cost of credit and, for that reason, it will always be superior to the TAN. It is expressed as an annual percentage of the total amount of credit.
So, the APR includes:
- Insurance required to obtain credit (if applicable);
- Current account maintenance fee (if you are required to open an account for credit management)
- Costs with payment operations and use of credit (if any);
- Remuneration of the credit intermediary, if this remuneration is paid by the consumer, which happens when using a non-binding credit intermediary;
Take note, however, that for credits contracted after January 1, 2021, you will not be charged commissions for processing credit installments (or similar).
As a way of protecting consumers, Banco de Portugal publishes the maximum APR to be applied to new contracts on a quarterly basis. At the first quarter of 2023for personal loans intended for education, health or renewable energies, the maximum rate is 6.3%, while for other personal loans the maximum rate is 13%.
Total Amount Imputed to the Consumer (MTIC)
The APR translates, in terms of annual percentage, the cost you will incur with the credit, but it will not tell you what you will pay in full.
To find out what you are actually going to pay for the credit, you have to look at another value – the Total Amount Imputed to the Consumer (MTIC), which is expressed in euros and whose value corresponds to the sum of the amount of the financing you requested, the respective costs with interest and commissions, taxes, insurance and other charges.
Reimbursement deadlines defined by law
The repayment term is the time it will take to pay back the money you borrowed.
Maximum repayment terms are also defined by law. Thus, from April 1, 2020, the maximum period is:
- 7 years: personal credit for no defined purpose, including appliances or other household goods;
- 10 years: for personal credit for education, health and renewable energy purposes (if duly proven).