As an individual looking to finance one of his projects it is always difficult to navigate the jungle of bank offers. This guide aims to shed light on this sensitive subject of interest rates.
A priori complex at first sight, the determination of the rate is based on more or less simple factors, more or less subjective and more or less subject to variation.
The credit risk factor
To begin your banker will try to appreciate the risk that it will take by lending you money, because from the moment it lends you a sum of money it mobilizes this sum in its balance sheet and if for some reason you do not repay that would show a loss in its balance sheet, this is not the purpose … to avoid that it will seek to assess your personal and professional situation with respect to credit risk. Your goal will be to reassure the bank about your creditworthiness and the stability of your situation.
The higher the risk, the higher the rate will be, it’s pure financial logic, in fact it is you who pay the insurance premium that will allow the bank to be assured of repayment of the loan.
For example, the more you have outstanding loans, the higher your debt is, the more risks that will weigh on your application for funding. On the other hand, the higher your contribution, the less the share of capital borrowed will be important in your project, and the more reassuring it will be for the bank, so less risk.
There are also factors intrinsic to the financing, if you ask for a credit over a long period, for example 72 months for a consumer credit or 30 years for a mortgage then the probability that there will be payment incidents during these periods is high, it is logical especially in the current period of economic instability.
To manage these credit risks and evaluate them, the bank has a rate risk tool or, more generally, asset / liability or GAP management tools that measure the variations in your income over a given period, the more there is. The more variation your file will be risky the higher the rate will be until refusal if your file is out of the ordinary.
The cost of capital
Beyond the financing of the risk that represents your loan, the banker must also finance the expenses inherent in the treatment and the follow-up of your loan thus and it is a very important part the cost of the capital that it puts at your disposal.
Today we are in a period of low interest rates because the DLB (Demo Lender Bank) provides banks with low-cost liquidity through lending facilities because the crisis that lasts the interbank market is not more as a provider of liquidity than it was. To give you an idea, the rate currently applied by the DLB is 0.05% / year on this type of loan.
Rates by type of credit
To conclude on this lighting, it should be known that for consumer credit which includes the credit car / motorcycle, work credits the rates are fixed by scale according to the amount borrowed and the duration of repayment and given the rate level of this type of credit they are identical for all the files.
If your file comes out of the risk profile required by the bank is the immediate refusal. On the other hand, for real estate loans, there are also scales, but the credit risk factor is taken into account to finalize the loan offer.