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1.11.2023 - Toimittaja - Loans
What is a loan? A loan is a contract between a lender and a borrower where the borrower commits to pay the loan back. A loan can be given or taken by an individual person or a juridic person like a company, government or municipality. Usually, the lenders are finance companies and banks that demand themselves an interest against the financial benefits that the other side has received. In best case scenario, both sides of the loan contract will be benefitted: the borrower will be able to fulfill investments that savings weren’t enough for and the lender receives interests as the compensation for the loan granted. The loan application- and granting process plays a significant role in creating economic growth: banks create money practically out of nowhere for a trusted facility such as an individual person or a company to for example start a company or build an apartment. When they have been able to repay their loan, the economy has grown and the amount of new money, equal to the borrowed money has entered the circulation. The process of applying for a loan varies depending on the loan applicant, the amount applied for and the purpose of use. The ground principle is that the repayment period, interest and, if necessary collaterals are agreed upon in the loan agreement. The use of the loan and the qualities of the loan applicant, as income level, have a relevant influence on the terms of the loan. For example, getting a mortgage requires substantial collateral, but the interest rates are typically low and the repayment periods are long. Consumer loans can even be obtained without collateral, but the interests can be tens or even hundreds of percent and the repayment periods short. The history of lending money goes back thousands of years. The basic principle of lending money has remained mainly the same but basic borrowing was mainly based on collateral lending where the borrower gives their property as collateral for loan repayment. If one doesn’t pay the loan back, will the borrower lose the pledged property. Lending money began to develop towards the modern model around the 13th century in Italy when banks financed the wars and later the expeditions of the rulers. Around the 17th century banks expanded the possibility of getting a loan to the common people. The first banks in Finland were established in the beginning of the 19th century in Turku and Helsinki.
The loan application process begins with the need for a loan acquisition, for which there is no money saved for or it is considered more reasonable to acquire it with borrowed money. In order to finance the acquisition, a lender must be found. A lender can be a bank, financial institution or a private individual. Different banks and financial institutions offer very similar services, so instead of the loan provider, the most important thing is to find a loan that is as affordable as possible. In order to find out the costs, you should send a loan application to several different loan providers, i. e. to tender the loan. The easiest way to apply for a loan is via the internet from the lenders web page by using your online banking ID or by making an appointment to the office. The lenders might demand a certificate of salary income, an employment contract or information about any collateral as proof of the ability to repay in the loan application. After receiving the loan application, the creditor sends the applicant a loan offer, which shows the loan conditions specified just for them. Accepting the loan offer leads to a binding agreement between the loan applicant and lender. Then the loan money is transferred to the use of the applicant.
To be able to compare the terms of the loan offers with each other, their composition and terminology must be understood. The expenses of the loan consist of loan interest and other credit costs that together form the real annual cost of the loan. According to the consumer protection act, the lender must clearly inform the loan applicant of the effective annual interest rate of the loan.
The interest of a loan can be either fixed or variable interest. The fixed interest rate is agreed with the financier in the loan agreement and it remains the same throughout the repayment period. On the other hand, variable interest is tied to a reference interest rate. The most common of which is the banks own prime interest rates and the euribor interest rates determined in the financial market between banks. The size of the variable interest rate can therefore change during the loan period according to the general market interest rate. The bank’s own loan margin is added to the reference rate, which remains the bank’s margin for the process. The customer’s relationship to the bank, income level, wealth, loan period, etc. can affect the loan margin. loan rate: fixed for ex. 2% or variable reference rate + margin
When calculating the actual price of the loan, in addition to interest, other credit costs that cause expenses must be taken into account, which vary considerably between different financiers. Typically these include an account management fee, opening fee, expenses for payment installments and various services such as an interest rate cap and the possibility of interest free repayments. An example of an actual annual cost of a loan: Timo takes out a 20 000€ loan for one year. The loan is paid off completely at the end of the loan term. The bank charges 4% interest on the loan, an opening fee of 200€, a withdrawal commission of 100€ and a monthly account management fee of 20€. Loan amount 20 000€
Actual loan amount 19 460€
When you calculate how many percent of the actual loan amount the aforementioned expenses are, you get the loan’s actual annual interest rate.
| 340 | x 100 = 6,9 % |
| 19460 € |
Note! The example above is a very simplified case of calculating the annual interest rate. The formula used to calculate the actual annual interest rate is fairly complicated to use, so when estimating the actual annual interest rate, it is better to use the loan’s interest rate calculator.
The loan amount can be repaid all at once on the due date or for example, it can be reduced monthly There are three different ways of shortening: Annuity reduction
Equal reduction
Equal shortening
For example, Timo takes a loan from the bank for 12 000€ with a one year repayment period. The interest rate on the loan is 5% (total 600€) and he repays the loan monthly. Timo compares different loan repayment methods: Annuity reduction:
Equal reduction:
Equal shortening
etc.
You can apply for a loan from traditional banks, financial institutions, or state supported operations. Attached are reliable and well known creditors: Nordea: https://www.nordea.fi/henkiloasiakkaat/palvelumme/lainat/ Danske Bank: https://danskebank.fi/sinulle/tuotteet/lainat OP Ryhmä: https://www.op.fi/henkiloasiakkaat/lainat-ja-asunnot/lainat S-pankki: https://www.s-pankki.fi/fi/lainat-ja-luotot/ Aktia: https://www.aktia.fi/fi/lainat Handelsbanken: https://www.handelsbanken.fi/fi/henkiloasiakkaat/lainat Svea Ekonomi: https://www.svea.com/fi/fi/kuluttajat/lainat/ Bank Norwegian: https://www.banknorwegian.fi/Laina Komplett Bank: https://www.komplettbank.fi/laina/ Resurs Bank: https://www.resursbank.fi/lainaa/ Business Finland: https://www.businessfinland.fi/suomalaisille-asiakkaille/ Finnvera: https://www.finnvera.fi/tuotteet/lainat
Reference interest rates of finnish deposit banks https://www.suomenpankki.fi/fi/Tilastot/korot/ Regulation on the actual annual interest rate of consumer credit: https://www.finlex.fi/fi/laki/ Interest rates for unsecured consumer loans differ greatly between credit institutions: https://www.suomenpankki.fi/fi/Tilastot/rahalaitosten-tase-lainat-ja-talletukset-ja-korot/ Right to cancel the credit agreement: https://www.kkv.fi/Tietoa-ja-ohjeita/Maksut-laskut-perinta Credit payment arrangements: https://www.kkv.fi/Tietoa-ja-ohjeita/Maksut-laskut-perinta/luotot/luoton-maksujarjestelyt/ Financial and debt counseling: https://oikeus.fi/oikeusapu/fi/index/talous_ja_velkaneuvonta.html Articles in Ite wiki: Best loan comparison sites in Finland: Parhaat lainanvertailusivustot ja lainanvertailupalvelut Free loan comparison calculator: Ilmainen lainalaskuri ja lainanvertailu Sheets / excel Article about how to apply fo a loan?: Lainan hakeminen List of it-companies in Finland: it-yritykset Suomessa
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