Sunday, 20 July 2014

Why credit costs

The loan is a specific service, but as a rule it does not differ much from other services performed for us or to purchase any product. The cost of the loan depends upon the many factors that interact with each other. What are the factors and to what extent they define incurred by us borrowing costs?

Profit and the environment

At the cost of each loan are fees and commissions off or repaid in installments. The need for remuneration of financial institutions in the form of fees and commissions belonging loan is dictated by many factors, but primarily by a desire to make a profit. Financial institutions do not differ from that of others, and seek to make a profit. The value of information to financial institutions credit costs also depends directly on the state of the national economy, including inflation, ie a decrease in the purchasing power of money. The costs of the loan is also directly linked to the market of banking services. First is the effect of competition between institutions, ie, lowering rates on loans in one institution can lead (and probably will) to the reaction from the competing institutions that followed her also reduce the amount of fees charged to borrowers. Second, there are also so-called lending rates at which banks lend money to each other. Indicators of interest shall be charged to the credit interest because they represent a kind of compensation for lost profits - bank lending means we can not lend them to another bank, which lost part of their income.

Purpose, security, risk

Another very important and at the same time extremely complex factor is risk. Any financial institution lending the money we bear the risk of integrity liability. This risk must be rewarded, because its level significantly determines the amount of credit costs. Costs the same loan may therefore differ depending on the situation and the history of the applicants for the borrowers. Borrower, who with due diligence had complied with previous commitments can count at this a possible reduction in funding parameters - risks associated with granting him the loan is smaller, which can also be subject to reduction for example, the interest rate of the loan. Its height is also linked to the purpose of the loan and the form of collateral. Hence the interest rate will be lower, eg in the case of car loans, where the car is the security for repayment of the loan, or mortgage, because repayment is guaranteed obligations imposed on real estate mortgage.

Making another security, such as a bill of exchange or surety guarantor, may also affect the yield additional benefits, such as lowering the rate of interest, or lack of having to pay commission for granting liability.

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