Costs of creditThere can be big differences between consumer credit costs. Read more about what they include and how to compare them.
Why is it worth comparing credit costs?
When searching for a suitable loan or consumer credit, it is important to pay attention to credit costs. Because credit costs can vary significantly between lenders and credit products, you should always compare them.
Before applying for credit:
- Explore different loan alternatives and their purposes
- Estimate the size of loan you need, and the repayment period
- Clarify the true costs of the credit
Costs of consumer credit
Credit costs are the key element of consumer credit. What the costs include depends on whether the credit is unsecured consumer credit or a secured bank loan.
Costs of unsecured consumer credit
- Loan servicing fee, 6 euros/month
- Credit interest rate, 3-month Euribor + 7.95% (11.91 % in December 2023)
Pricing models for unsecured consumer credit
When comparing unsecured loans, you may notice that a wide range of pricing models are used. In some cases, the price of unsecured credit may depend on the amount borrowed, or whether you mainly bank with the lender. The most generally used model is so-called risk-based pricing, where the interest rate is based on the customer information used when making the credit decision.
Additionally, different credit providers may use different base and reference interest rates. When comparing loans, take note of whether a fixed interest rate or reference rate, such as the 3-month Euribor, is being used.
Methods of repaying secured loans
The costs of secured loans depend on the amount borrowed — and the chosen repayment method. You can choose between variable annuity, equal payment and equal amortisation as repayment methods, depending on which is the best fit with your circumstances. Be aware that the repayment method can have a major impact on the size of repayments.
Costs of secured loans
As well as the borrowed amount, the final costs of secured loans include the establishment fee, interest and monthly loan servicing fees. In addition, there may be costs due to obtaining collateral documentation: ordering a house manager’s certificate, or a certificate of registration of title and certificate of abstract of title.
When comparing loans, note that the margin paid on the bank loan is individual for each customer. This is affected by factors such as the collateral you can provide, your repayment capability, and whether you mainly bank with OP.
The costs of secured consumer credit include:
- A maximum origination fee of 120 euros charged when the loan is drawn down, as well as a monthly servicing fee of 2.50 euros
- The interest on the loan, for example 12-month Euribor + customer-specific margin
- The costs of required documents attached to the loan application
Comparison of credit costs
Credit costs can be handily compared by using the effective interest rate and total costs. The effective interest rate must always be expressed as a percentage, to make comparisons between credit products as easy as possible.
When comparing credit costs, check that the offer is based on the same loan amount and loan term (payback period). If the loan terms are different, comparing the total credit costs will provide a more reliable picture of how expensive the alternatives are. In the case of long loan terms, comparing the effective interest rate is the best way of estimating the costs.
Before applying for credit, remember to find out about the so-called Standard European Consumer Credit Information. The purpose of such information is to make comparisons between loans easier.
A bank loan is one-off credit. If the 12-month Euribor is 4.091% (August 18, 2023) and the loan’s interest rate is a 3.9% margin plus the 12-month Euribor, the effective interest rate on a bank loan of 10,000 euros with a five-year repayment period will be 7.9%. A monthly servicing fee of 2.50 euros per month will be charged. An origination fee of 120 euros will be payable when the loan is drawn down. The estimated total amount payable will be 12,046.06 euros.
This calculation is based on the assumption that the entire loan has been drawn down, the loan interest rate, fees and charges are constant throughout the loan term, and the loan is repaid in equal instalments of 196.28 euros each month. The bank loan is granted by an OP cooperative bank.
Special Consumer Credit is a one-off loan: the effective interest rate for a 6,000-euro loan with a 5-year payback period would be 14.24 % if the credit interest rate were the 3-month Euribor + 7.95% (11.91 % in December 2023) and the loan servicing fee 6 euros per month.
The estimated total amount payable would be 8,176.89 euros. This calculation is based on the assumption that the loan is drawn down in a lump sum and the loan interest and charges and fees remain unchanged throughout the loan term. It also assumes that the loan is repaid in monthly instalments of 145 euros all the way to the final instalment.
The loan is granted by OP Retail Customers Plc
Flexible Consumer Credit is a revolving credit whose effective interest rate for 2,000 euros is 18.55 % when the loan interest rate is a 3-month Euribor + 7.95 percentage points (11.91 % in December 2023) and a six-euro loan servicing fee per month.
The estimated total amount payable would be 2,175.98 euros. This calculation is based on the assumption that the entire loan is drawn down and that the interest rate and charges and fees remain unchanged throughout the loan term. It is also assumed that the loan is repaid in the monthly minimum repayments of 225 euros, resulting in a loan period of 12 months.
The loan is granted by OP Retail Customers Plc