Borrowing: general definition
Borrowing is defined as a transaction involving a natural or legal person seeking from a lender, mainly a bank, the provision of a sum of money at a variable or fixed interest rate and a term of determined. A loan takes the form of a contract that binds a lender and a borrower, who agrees to honor a financial debt.
If the loan and the bank credit both correspond to the transfer of a sum of money from the lender to the borrower on the condition of a subsequent repayment at a given interest rate, the main difference lies in the duration of the loan. on which the operation is inscribed. In fact, the loan mainly refers to a long-term financial debt, while bank credit is usually a medium and short-term operation. The loan is most commonly used to finance: the acquisition of real estate, the constitution of a starting capital in the case of a company, or the purchase of certain consumer products, such as a car or equipment.
The main elements of the loan
The two main types of borrowing are the undivided loan, usually contracted by a single borrower from a single lender, and the bond issue, which consists of the creation by a company of bonds for financing purposes. Thus, the undivided loan is most often contracted by individuals as well as SMEs, while the bond issue relates exclusively to large companies.
The undivided loan consists of the following three components: depreciation, interest and annuity, which the borrower commits to pay at the time the financial debt is incurred. The amortization of the loan corresponds to the repayment of the borrowed capital, while the interest is the sum fixed by the interest rate and collected by the lender as remuneration of the loan. Finally, the annuity is the amount accumulating amortization and interest, and corresponds to an annual payment.
Prerequisites to the loan application
Before taking out a loan, the borrower must take into account three major conditions in his file: income and financial stability, the debt ratio, and banking at the Francia Bank.
Income conditions for borrowing
Since the loan constitutes a financial debt, the banks are particularly attentive to the borrower’s income. In the context of a mortgage, car or any other project of a significant amount exceeding 3,000 euros, the majority of banks require the borrower a guarantee of fixed income each month and related to a stable employment situation. Thus, the chances of receiving an agreement for borrowing are higher if the borrower is able to present income from a contract of indefinite duration or a position in the public service. In addition, in the case of mortgage borrowing, banks often also ensure the financial stability of the borrower by asking him to provide the last bank statements of the past months – generally the last three months.
The debt ratio of a loan
Similarly, banks particularly examine the level of the borrower’s income to define the debt ratio in the context of a financial debt or several. Before taking out a loan, the calculation of the debt ratio makes it possible to measure the borrower’s ability to easily repay all of its financial debts. In the context of a loan, the debt ratio is calculated as follows: Debt ratio = monthly financial charges for all loans contracted x 100 ÷ monthly income available. Banks and other lenders place the maximum debt ratio at almost a third, or 30% to 33%, of the borrower’s available income. However, in addition to the income level of the borrower, a good personal contribution is also an advantage to take out a loan under better conditions.
Filing at the Francia Bank
Moreover, in France, another key element of a loan file is the lack of registration at the Francia Bank. There are two main types of files at the Francia Bank. On the one hand, the FCC file, or Central File of Checks, includes unpaid checks and bank card misuse. FCC registration makes it impossible to issue new checks and withdraw the credit card. On the other hand, the file FICP, or File of Incidents of Repayment of Credits to the Individuals, corresponds to the delays or misses in the repayment of the annualities of loan and credit. For a borrower, registration in the FICP file does not lead to an automatic sanction or a formal ban on borrowing. However, such an informative record can still limit the borrower’s ability to resort to financial debt.
Amortization of the loan
Once the loan is contracted, the repayment is done in periodic installments. A loan is said to be depreciable when these payments are composed of a portion repaying the initial capital, and a portion corresponding to the interest calculated on the capital remaining due by the borrower. The amortization of a loan corresponds to its repayment. The amortization is caused to vary according to the amount of the loan. For example, a car generally depreciates over five years, while a mortgage tends to be amortized in 15 to 20 years. The three main types of amortization of a loan are: the constant amortization of capital, the amortization with constant annuities and the repayment in fine.
Constant amortization of the principal amount of the loan
The constant amortization of the principal amount of the loan, also known as a repayment with decreasing terms, includes: a fixed portion corresponding to the repayment of the capital and a part corresponding to the interest calculated in relation to the capital remaining due. The remaining capital decreases progressively as annuities increase, and consequently the interest, therefore the total sum to be paid at each maturity, also decreases. This type of depreciation is mainly intended for borrowers such as companies and local authorities, and does not concern individuals borrowing money.
Depreciation with constant annuities
Depreciation with constant annuities is the type of depreciation most frequently used by individual borrowers. Also known as progressive capital repayment, this method of depreciation consists of annuities with a fixed amount. Once the loan is contracted, the borrower agrees to pay the lender the same amount at each maturity until the end of the repayment. Thus, at the beginning of the amortization, the portion devoted to interest occupies a larger share of the amount paid at each maturity, and then tends to decrease gradually while the share corresponding to the repayment of capital increases. The progressive amortization loan offers the borrower the convenience of easily arranging annuities, to the extent that the same amount is paid by maturity, over the entire term of repayment of the financial debt. In addition, the depreciation with constant annuities has the advantage of allowing the borrower to spread out over time the financial effort related to the loan.
The repayment in fine
Finally, the repayment in fine implies that the borrower repays all interest and principal of the loan at the end of the loan, with no intermediate maturity. During the term of the loan, the borrower pays interest on his loan, the amount of which remains unchanged. This type of repayment is mainly used in the case of rental real estate purchases, one of the advantages of this type of amortization being shorter maturities than in the case of a loan whose capital must be amortized as of departure.
Borrowing and types of interest rates
In the case of a loan, the interest rate corresponds to the remuneration paid by the borrower to the lender, expressed as a percentage of the total amount. The duration of the loan as well as the nature of the risks incurred by the lender affect the percentage of the interest rate. The interest rate offered by the bank to the borrower is calculated according to the Euribor, ie the interest rate at which banks lend to each other. In terms of fluctuations in the interest rates of the loan, the borrower has the choice between three main types of rate: the fixed rate, the variable or revisable rate, and the mixed rate.
The fixed rate loan
The fixed rate loan is a loan with an interest rate that is identical from the beginning to the end of the term. From the loan offer, the borrower knows the interest rate, but also the total cost of the loan, the repayment term and the amount of the maturities: this is the reason why this type of rate is considered as the safest. The fixed rate loan is also the one that tends to have the highest price at subscription, because the bank is committed to offer the same rate over the entire duration even if the Euribor evolves.
The variable rate loan
The variable or reversible loan is a loan whose interest rate varies according to a benchmark determined at the time of the subscription of the credit. The borrower is therefore not able to know in advance the total cost of the loan because this cost is calculated according to the interest rate. While the benchmark is most often Euribor, some banks may use foreign currencies and other indices. The variable rate loan is therefore more risky than the fixed rate loan, but it also appears to be less costly because the bank can adapt to Euribor developments by adjusting the interest rate if necessary. In addition, the variable rate is generally governed by a maximum ceiling rate, or cap, and a minimum floor rate, or floor, beyond which it can not evolve.
Thus, the two most obvious advantages of the variable rate loan are an initial rate lower than that of a fixed rate loan on the one hand, and the possibility of further interest rate cuts. Both of these advantages would be useful in borrowing situations with both a large differential between the floating and fixed rate index and high fixed rates above 6%. However, the floating interest rate may still be advantageous in periods of low fixed rates in the case of short-term operations of less than eight years duration, with a good starting rate that varies little over the first three years. In this case, the borrower is a customer who does not need to borrow for a long time, or the certainty of selling his property quickly.
The mixed rate loan
Finally, the mixed rate loan presents a moderately risky and expensive solution, halfway between the fixed rate and the variable rate. Indeed, the interest rate can then be fixed in the first years, then variable on the continuation of the loan. This type of rate is particularly attractive for the borrower if he plans to sell his property before the end of his loan, for example before the rate becomes variable. top