Are the costs of loans more and more expensive? How it works ?

For the past two years, a historic drop in interest rates has been observed on the credit market, more specifically mortgage loans. Unheard of as some specialists would say. After a slight increase in 2017, a further drop in the gross rate is observed in 2018. What motivates people wishing to embark on a project requiring funding.

Bank interest rate: understanding how it works

Bank interest rate: understanding how it works

A loan is made up of several elements. In addition to the capital borrowed, the bank adds the interest rate and various fees including, in particular, administration fees, insurance, guarantees and prepayment penalties.

In this whole lot, it is mainly the interest rate that costs the most to a borrower. Its calculation is made on the basis of several factors: the bank’s margin, the credit manufacturing costs, the risk premium (software, employee compensation, etc.) and finally the rate of the financial markets. The latter is based on the key rate applied by the European Central Bank.

Note that in terms of credit, there are different types of interest rates

Note that in terms of credit, there are different types of interest rates

The most classic is represented by the fixed rate which, as its name suggests, remains unchanged throughout the life of the loan. It is recommended for long-term loans and is calculated on the basis of the 10-year Treasury Bond (10-year OAT). The variable rate can go up or down depending on the market.

Which makes it both beneficial and very dangerous. This is why the banks have created the revisable capped rate which is limited by a ceiling in the event of too large an increase in the market rate. Note that this rate is indexed for its part on Euribor.

Rise or fall in the interest rate?

Rise or fall in the interest rate?

In the mortgage market, rates fell sharply. The most historic drop was observed in November 2016 when they forecast 1.31% whereas a year before, they were still 2.28%. In August 2017, a small rise of 1.57% was felt. And in 2018, the crude rate plunged again to 1.48% in July.

All this to say that the rates are currently very low. Will this trend continue? Not so sure. The European Central Bank has in fact expressed its desire to end its policy of low key rates, which will necessarily increase lending rates. Borrowers should expect to pay more for their loans.

Despite this situation, they should not only bet on a low interest rate to have a cheaper loan. Let’s not forget that the cost depends not only on the interest rate, but also on the duration of the loan, the amount borrowed and the risk profile. We must therefore already think about taking good care of your file. And to easily find a loan, there are all kinds of credit simulators that you should not hesitate to use.

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