What is the total cost of the loan?
When buying a flat, house or other property that we want to finance with a loan, we are most often looking for a bank that offers the most attractive terms. Before we make a decision that will bind us to the selected bank for many years, you should carefully look at all the details of the contract. Before signing it, it is worth analyzing not only the interest rate and commission, but also other fees that make up the total cost of the loan.
Each lender, such as a bank or other financial institution, collects a fixed commission from the client for granting funds for the implementation of the selected goal. But this is not the only fee. The total cost of credit usually includes a few additional charges.
Interest rate, ie interest rate and margin
The basic parameter affecting the total cost of credit is interest. It includes interest rate and margin. The interest rate depends only on the findings of the Monetary Policy Council, the body of the National Bank, while the margin is set by the bank and is its current earnings. The interest rate is not affected by either the lender or the client, but the amount of the loan installment depends on its amount. An increase in the interest rate automatically increases the loan installment, and a decrease results in a smaller installment. The second component of the loan interest rate, which also affects the installment amount, ie the margin, is set by the lender and does not change during the entire loan period. The amount of the margin depends on several factors, such as:
- loan amount,
- bank commission,
- loan purpose,
- customer credit history and creditworthiness,
- ratio of loan amount to real estate value,
- purchase of additional banking products,
- prior use of the services of a given bank.
The amount of the margin, which partly depends on the financial situation, own contribution and customer choices can be negotiated. It is worth remembering before signing the contract, because the margin significantly affects the total cost of the loan.
The amount of commission
The commission is a one-time fee, which is a kind of remuneration for granting a loan. The commission amount is set by the lender and usually accounts for 2% of the total loan amount. Just like the amount of the margin, the customer can also negotiate the amount of commission. At best, although this is rare, the commission can be reduced to a minimum – almost to zero. In case of worse financial condition and other factors lowering the borrower’s negotiating position, the amount of commission may, unfortunately, be higher. However, usually the commission for granting the loan is included in the total cost of the loan and repaid with each installment.
Additional loan costs
Because every, especially long-term financial liability involves risk for both the bank and the client, currently additional insurance is usually required for each type of loan. It can be life insurance, which in the event of the client’s death or permanent incapacity to work covers the entire loan amount. Paying for insurance increases the cost of the loan, but in random situations protects the lender and the borrower, as well as his heirs.
Real estate appraisal
Another additional cost that can affect the total cost of a loan is a flat or house appraisal fee. If we want to finance the purchase of real estate on the secondary market with a loan, the bank may require a valuation. Regardless of whether we order an independent property appraiser or a bank does it on our behalf, the cost of the loan should also include a remuneration for the valuation, which can be as much as several hundred dollars.