Financial education:
What do I need to know about loans?
Financial education:
What do I need to know about types of interest?
Financial education:
What do I need to know about insurance and insuring of loans?
A Credit is a certain amount of money that the bank has ceded to the client for use for a certain period of time under certain conditions and with the payment of a fee – interest, as the price of using those funds. According to their purpose, loans can be non-purpose or cash and purposeful such as: consumer, housing, investment or working capital loans. Only banks and other legal entities that have received a license to operate from the Banking Agency of the Republic of Srpska can engage in lending to legal and natural persons.
Interest represents the price paid by the debtor (client) to the lender (bank) for the use of funds. When the interest is expressed as a percentage, we get the interest rate, the amount of which depends on the type of loan, the term of the loan, debt collection security instruments, market conditions, competition, inflation rate, credit rating of the country, etc.
Nominal interest rate – an interest rate that represents a percentage that determines how many monetary units are paid per loan unit and is used to calculate regular interest on a given loan. It can be fixed or variable.
Conformal interest rate is a rate at which the same amount of interest is calculated, regardless of whether an interest is calculated once at the end of the repayment period or more than once within the repayment period.
Proportional interest rate is the rate at which a different amount of interest is obtained depending on whether the interest is calculated once at the end of the repayment period or several times during the repayment of the loan itself. Namely, if the interest is calculated several times during the repayment period, the total interest amount is higher than if it was calculated only once at the end of the loan repayment period. If the proportional annual interest rate is reduced to a monthly interest rate, then it can be obtained by simply dividing the annual interest rate by the number of accounting periods, e.g. if the annual interest rate is 6%, the monthly interest rate is obtained when we divide 6% by the number of months 12 and we get that the monthly interest rate is 0.5%.
The Effective interest rate (EKS) represents the real price of the loan and enables an easier overview and comparison of the conditions under which different banks offer the same loans. The effective interest rate, in addition to the nominal interest rate, includes fees and commissions that the client pays to the bank for granting the loan. If we are talking about loans approved with a deposit, EKS also includes income based on the interest paid by the bank on that deposit. However, it should be borne in mind that there is a part of the costs that are not included in the EKS, such as: exchange rate changes if the loan is with a currency clause, the costs of assessing the value of the means of securing the loan, the costs of various certificates, certificates, permits and decisions of the competent authorities , the costs of the Credit Bureau,… These costs are not included in the calculation of EKS since they are not known on the day of the EKS calculation, but they may arise during the implementation of the loan agreement, or they do not represent the bank’s income.
Intercalary interest is the interest that is calculated and charged only from the moment you are granted a loan until the moment you start repaying it, that is, until the first installment is collected. Depending on the business policy, the bank can attribute the calculated intercalary interest to the principal of the debt and collect it through an annuity/installment or all at once – after the expiry of the loan. If the bank calculates intercalary interest, you should check with the bank officials before concluding the contract when it would be best to pay you the loan so that the intercalary interest is as low as possible.
Default interest is an interest calculated and charged in case a client fails to meet the obligations in accordance with the provisions of the concluded agreement.
EURIBOR or the European interbank rate (“Euro Interbank Offered Rate”) represents a reference interest rate based on the average interest rate at which banks lend money to each other on the interbank market. The value of EURIBOR is determined by the European Banking Federation every day.
Loan annuity (installment) represents a regular, most often monthly, payment of a certain amount of money comprised of a part of the principal of a loan and part of the interest calculated under nominal interest rate which a client needs to pay on behalf of gradual loan repayment. In addition to monthly, the payment may be on a quarterly, semi-annual, annual basis, depending on the contracted conditions. Annuity, i.e. installment consists of a debt principal amount and of a part related to accrued interest. Annuity for loans to physical persons is usually the same for all repayment periods, except for the last one when it can vary. There is a method of calculation when annuity (installment) changes per each repayment period because the principal amount to be paid is always the same, while the interest is calculated on the remaining debt amount. In both methods of loan repayment, the interest is calculated on the remaining debt.
When concluding the loan agreement, a bank shall inform a client about significant loan elements by means of providing an overview of all loan repayment elements.
Grace period is a period in which a loan is made available to a client, but the repayment of loan principal has not yet been initiated. During this period, the interest is usually calculated on total loan amount, hence a client is to pay a higher overall interest than in case the grace period has not been used.
Loans with currency clause is a loan denominated in KM (BAM) and includes a clause by means of which a bank, in case of changes in the value of (KM) BAM to EUR during the loan repayment, is entitled to convert the remaining amount of loan principal to EUR at the middle exchange rate of the Central bank, by which a client is obliged to continue with the loan repayment according to the established (KM) BAM to EUR exchange rate by the Central bank on the day of loan maturity and payment.
Foreign currency loan, most usually Swiss franc loan, is a loan denominated in a certain foreign currency and includes a clause by which a loan repayment is related to the exchange rate movements of that foreign currency. For clients, this type of loan carries a high level of risk – risk of exchange rate changes, i.e. uncertainties for loan users in terms of overall obligations per loan taken, and therefore in terms of possibilities to meet the loan obligations within the contracted period. It is possible to protect oneself from this risk only if one receives regular monthly income (e.g. salary), used for the loan repayment, related to the same currency.
Refinancing loan is a loan which a bank extends to a client for the purpose of settling the obligations stemming from one or more loans already granted to that client by one or more banks. By taking a refinancing loan, a client is in a position to settle one or more existing obligations towards banks, regardless of whether those obligations are due for payment or not. When taking a refinancing loan, a client should consider the cost-effectiveness of refinancing itself. Namely, regardless of the fact that a new loan can fulfill its basic goal, i.e. decrease the amount of monthly installment, a client should have in mind that the prolongation of repayment period increases the total costs in terms of interest. A client should also take into consideration that almost all banks charge commission for the prepayment of loan, which increases the costs of new loan approval.
Creditworthiness represents a financial ability of a debtor to repay the loan, increased for an appropriate amount of interest when due.
Each bank individually assesses client’s creditworthiness based on the report of the Central Registry of Credits on a client’s credit indebtedness and timely and regularly settlement of obligations, as well as based on other documentation (mortgage type, monthly income, and other).
Non-purpose/cash loan has no agreed purpose and the user independently decides on the use of loan funds. This group of loans includes cash loans, overdrafts on current accounts, credit cards, and the like. When approving non-purpose loans, the amount of the loan cannot exceed 50,000.00 KM, and the maximum repayment term is up to 10 years.
Premature repayment of the loan is the right of the borrower to repay the loan, in whole or in part, before the agreed term. The user is obliged to notify the bank or other creditor in advance in writing about the intention of early repayment, in the manner defined by the loan agreement.
The bank cannot demand compensation for early repayment of the loan:
1. if the fee or its amount is not agreed upon,
2. if the repayment is made during the period for which the variable nominal interest rate is contracted,
3. if the repayment was made on the basis of a concluded insurance contract, the purpose of which is to secure repayment,
4. if the amount of early repayment of the loan in a period of one year is less than 10,000.00 KM (banks) or 5,000.00 KM (MKO), and
5. in case of settlement of the allowed overdraft on the account.
LIBOR (English London Interbank Offered Rate) or London interbank rate represents the average interest rate at which selected banks, within certain panels (for the euro, the US dollar, the Swiss franc, the British pound and the Japanese yen), they lend and lend money to each other on the London money market. The LIBOR interest rate is determined for each working day, and for different periods (from daily to yearly). This means that every day it is possible to check the last value, e.g. three-month or six-month LIBOR rates. Financial institutions around the world use this rate as a reference (basic, initial) rate for calculating the prices of their services. For example, the interest rate in the loan agreement is often determined as the sum of, say, the six-month LIBOR rate and a certain margin (interest rate matte = 6M Libor + 2.50 %). Therefore, the increase or decrease in its value affects the increase or decrease in interest rates for various banking products.
Revolving credit is a type of non-purpose loan, without a predetermined repayment period, and with the possibility of using part or all of the amount that the bank has made available to the user. The user has the obligation to return the used amount immediately or in installments that cannot be below the contracted minimum. The very dynamics of repayment within the contract is determined by the user, and the total price of the revolving loan will depend on the speed (dynamics) of the return of the total amount.