When applying for a loan for a specific purpose, such as a car, renovation, or vacation, consumer credit is commonly talked about. Before applying for a consumer credit, however, it is good to know that not all consumer loans follow the same formula: a consumer credit can be unsecured or secured, and it can also be applied for a flexible or peer-to-peer loan. . In this guide, Good Finance clarifies what these terms mean and how they differ.
Consumer credit is a loan that is to be used for some form of consumption. For example, you can use a car, a renovation or a holiday, where you can also call a consumer loan a car loan, a renovation loan, or a vacation loan. The value of a loan is often low and the loan period short, so the repayment of the loan is usually within a few years.
The most typical consumer credit in Finland is around EUR 15,000 – however in general the value of consumer credit ranges from EUR 1,000 to as much as EUR 50,000. Because consumer credit can be applied for many needs, it is always worthwhile for a consumer to carefully consider the purpose and need of a consumer credit and his or her repayment ability before applying for a loan.
The principle behind consumer credit is clear. The loan is usually repaid in equal installments, which include interest in addition to the principal and various opening and service charges. Equal amounts help to plan future payments, as the amount of installments does not vary. Smaller installments mean longer loan periods and larger installments mean shorter. Consumer credit can also be paid off faster than agreed with your bank or finance company, and can often be repaid early without costs.
Unsecured consumer credit
In unsecured consumer loans, you can apply for a loan without collateral or guarantors, and in addition, loan processing times are often faster than secured loans. However, the interest rates on unsecured consumer loans are often higher than those on collateral, banks or finance companies have nothing to compensate for their own losses if the borrower is unable to repay their loan in full. Often, the interest rates on unsecured loans are determined on a customer-by-customer basis, ie based on the customer’s risk assessment.
The benefit of unsecured consumer loans lies in their very unsecured nature. If the borrower does not have eligible assets or guarantors, the borrowing opportunity will not be fully covered. However, borrowing must always be a deliberate decision, no matter how easy it is to get a loan.
Secured Consumer Credit
In secured consumer loans, the borrower gives the bank or finance company some form of security against their loan against their own assets. For example, housing, a car, a motorcycle, a summer cottage or other eligible property owned by the borrower may be covered. In secured consumer loans, the interest rate on a loan is often lower than in an unsecured consumer loan, because the lender’s risk of losing the loan is reduced.
In the event of a potential insolvency, the bank or finance company may offset its losses with collateral. Thus, the security acts as a kind of ‘pledge’ to the lender.
Consumer credit can be raised either as a one-time loan or as a continuous flexible loan. A one-time loan is a fixed loan amount that is granted and withdrawn in one installment at a time. After the drawdown, repayment begins in monthly installments. In soft loans, on the other hand, consumer credit can be raised in installments up to the credit limit of the loan. For example, if your Credit Line has a credit line of $ 3,000, this means that you can take out a loan for as little as $ 1,000, after which you have the option of raising another $ 2,000. The loan amount can thus be increased either in whole or in smaller installments. When the credit is repaid, the same amount is released for re-draw. The process works the same as using a credit card.
Types of interest and other payments on consumer credit
The interest rate on a consumer credit can either be fixed or individual. Applicant-specific interest rate refers to a situation where the interest rate is determined by the customer’s risk assessment. The risk assessment takes into account, among other things, the client’s income, employment, housing and many other factors. In terms of client-specific interest rates, it is worth noting that applicants often do not get consumer credit at the lowest marketed interest rate. As a general rule, low-risk clients receive a lower interest rate than high-risk clients. In fixed rate consumer loans, the interest rate remains the same for all applicants, which also facilitates comparison.
In addition to interest, you should pay attention to any opening and service fees when applying for a loan. You can easily see the current costs using the actual annual interest rate, which adds up to the interest on the loans and other payments.