To finance a purchase of property (automobile, travel, furniture…) or services (studies, work…) individuals sometimes use consumer credit. In France, only banking institutions approved by the Franciabank (and whose list is available on the register of financial agents) can offer a credit to consumption.
Several types of credits can be subscribed:
- The revolving credit: It is a sum available and restocked by the banking establishment with each use of the customer. A customer can buy a fridge at 350 € for example by having small monthly payments (20 €) but pay high interest on this sum (20% of APR). The customer can reuse his reserve of money to buy another property and will also have to pay high interest. The multiplicity of “small purchases” can be expensive.
- The affected personal loan: This is a personal loan amortizable, fixed rate and fixed monthly payment assigned to a particular project. The customer must show a proof of purchase or assignment of his loan (quote works for example)
- Unallocated Personal Loan: This is a personal, amortizable loan not affiliated with a particular project. The contractor can use the sum as he wishes. The client’s project in this case will only be declarative.
Financial institutions are often voluntarily “opaque” when it comes to offering an offer. Depending on the customer and especially the margin they will make, they push this or that product. We will discuss here the case of the unaffected personal loan: how to choose the right offer and avoid “scams”?
Definition of the personal loan
- Definition: The depreciable personal loan is a banking product that enables households to buy consumer goods or finance their personal needs. The duration, the amount and the periodic repayments are determined in advance and are not revisable during the life of the loan (except prepayments).
- Operation of the personal loan: Each month, the borrower repays a portion of the loaned capital with the interest provided for in the credit agreement offer. It is possible to take out a personal loan from a “traditional” banking institution or credit institutions specializing in consumer credit.
2. Mandatory Information
Financial institutions are required to submit the offer in a consistent manner to help the customer compare offers. These changes took place at the time of publication of the Lagarde law on July 2, 2010.
Among the essential information that the establishment must display are:
- The total amount borrowed
- The duration of the credit
- The amount repaid each month
- The total cost of credit
- The annual percentage rate of charge (APR)
- The repayment terms
- These elements are not modifiable during the life of the contract.
3. Compare several personal loan offers
In France, a dozen banking players offer personal loans. The profusion of information makes it difficult to compare different offers. In addition, organizations tend to present the offer in its best form: one will have a better rate, the other will offer more competitive insurance, etc.
Also, some precautions are necessary to choose the most suitable personal loan for your budget:
- Compare the total cost of credit: it is all the expenses borne by the customer over the duration of the credit, it must be the main indicator of decision.
- Compare the amount of monthly repayments and the annual percentage rate of charge for the same period (24 months for example)
- Is there a need for personal input? Some organizations offer very advantageous rates but ask for a contribution. This is often the case in the automotive industry: manufacturers offer offers at 0% APR but with a contribution of 30% on the total amount of credit. For a € 15,000 car, € 4,500 will be needed to benefit from the manufacturer’s financing offer.
- Is the prepayment available, if yes with or without fees?
- Are the booking fees included in the total cost of the credit?
- Compare the additional cost of a monthly insurance in case of job loss or death (some organizations have insurance costs much higher than others)
Example: Comparison of the credistair Offer and a competitor for a loan of € 4,000 over 24 months *
In the offer above, the monthly payment compared is lower on the credistair offer (173.57 €) than on the Competitor (186.13 €).
The total cost of credit is lower at credistair (285.68 €) than that of the competitor (467.12 €)
Personal Loan: Advantages and Disadvantages
1. An “easy” product to understand
The personal loan or consumer credit market is regulated by the Franciabank, which imposes restrictions on credit institutions to protect consumers. The Lagarde law has helped to protect the latter by clarifying credit offers and the legibility of advertising on credit.
Many other unregulated markets observe harmful drifts for the customer, for example in Russia.
2. A “simple” product to manage.
The fixed and established duration at the beginning of the credit makes it much more secure than the revolving credit. The revolving credit is contracted over an unlimited period of time. It is this type of credit that is the main cause of household over-indebtedness.
b. The inconvenients
1. A product sometimes designed to satisfy financial institutions more than to meet customer needs
Like the market for mobile telephony (regulated by ARCEP), the credit market is a sector where few players officiate. By locking the market to better secure supply, the Franciabank does not avoid the cronyism effect that oligopolistic markets sometimes experience.
Unfortunately, banks often offer high rates because consumer credit remains a major source of profit. The full interest on the credits is paid back to them while they do not pay the savings collected from individuals in the same proportions …
We have also observed the effects of the entry of a new player (Free) in the field of telephony!
2. The absence of the “positive file”
Financial institutions, excluding special agreements, do not share information about their customers. The most vulnerable people often try to take the credit too much from a new institution, hiding the credits previously subscribed not to be refused …
The positive file, which a large number of European countries have adopted (United Kingdom, Belgium …) would improve the quality of work of banking institutions … which obviously do not wish to share information (this technique allows them indeed not to “help” a new entrant!).
3. Banking Schixui
In the credit market, specialized lending institutions or banks are the only alternatives and each has positive and negative points:
- Credit institutions have a faster and more efficient distribution but no flexibility or advisory function.
- Banks lack flexibility (the steps are often long and complicated) but have (or “should have”) a dimension of “advice” that credit institutions do not have.
When you want to finance a project, you always have to look to personal loans. This product is indeed technically “thought” for the customer. Of course, we must be attentive to the practical details of the offers you can get.
Step by step, regulators are opening up to innovations that will allow the personal loan to fully meet the demands of the clients they serve. We see it for example on the loan market between individuals, who see the emergence of new players whose goal is to go in the direction of the customer!