2. Loan Products*
2.1. What is a consumer loan?
Consumer loans are loans granted to clients-physical persons for financing current needs including purchase of commodities and/or services. Consumer loans are usually granted for small amounts of money and their collateral could be a warrant, client’s salary, a pledge of a movable property, etc. or a combination of different collaterals. Interest rates on consumer loans are usually higher compared to the interest rates on mortgage and home loans. Consumer loans are regulated by the Consumer Credit Law which has been in force since October, 1st 2006.
2.2. What is a home loan?
Home loans are loans granted to clients – physical persons, usually against a mortgage but they can be guaranteed with other types of collateral as these loans are designed for funding home building or house improvement and renovation. When granting home loans banks keep a close watch if the loans are used in accordance with their purpose. Home loans are mainly regulated by the Law on Credit Agreements for Consumers relating to Residential Immovable Property which has been in force since 29th of July 2016.
2.3. What is the difference between mortgage loans compared to home loans and consumer loans?
Mortgage loans are those types of loans that are guaranteed by a mortgage. They can be home loans or consumer loans as their maturity is usually longer than that of consumer loans and the interest rate is lower due to the higher security of the collateral provided. Contrary to consumer loans which are not guaranteed by a mortgage when taking a consumer loan the client has to bear additional expenses related to the evaluation of the mortgage, for setting up a mortgage, etc.
2.4. What is an overdraft?
The overdraft is a loan granted by a bank on a current account and it gives an opportunity to the client to exceed the balance on his/her account. The overdraft is paid off automatically when the money comes to the client’s current account. The client may use the whole amount of the overdraft or part of it as the client owes an interest on the amount taken. Interest rates on overdraft are usually higher compared to those on consumer loans as in the case of consumer loans their withdrawal and installments are preliminary planned and they usually have more secure collateral in comparison with overdrafts.
2.5. What is a credit line?
The credit line is a loan that can be taken for a definite period of time entirely or in parts up to the agreed limit between the bank and the client. The interest due by the client is paid only on the amount taken as a part of the credit line but the client usually pays other expenses related to the credit line granting as a charge for engagement of a loan resource, etc. Installments on a credit line are made in accordance with the concrete agreement between the bank and the client. Credit lines are granted mainly to firms.
2.6. What is a financial leasing?
Commodities for business and for home (cars, house equipment, office equipment, etc.) can be bought on leasing as it is not necessary additional collateral to be provided. The commodity itself may serve as such a collateral. The commodity that is bought on leasing belongs to the leasing provider until the payment of all installments and the commodity is subsequently acquired by the client. The interest is accrued on the amount of funding but not the amount at which the commodity is bought as the client is usually required to pay with own funds a part of the price of the commodity that is bought on leasing.
2.7. Which interest rates are fixed and which are floating (variable)?
Floating (variable) interest rates change during the maturity of a deposit or a loan and they are usually a combination of a base interest rate and a supplement. The supplement has a fixed value and the base interest rate can be an index, e.g. BIR, EURIBOR, LIBOR or other index. Variable interest rates are usually applied on loans with a longer maturity. Fixed interest rates are interest rates agreed between the bank and the client on deposits or loans, e.g. 5%, which do not change for a definite period of time.
2.8. What is BIR?
BIR is the base interest rate, which is calculated and announced by the Bulgarian National Bank (BNB) and which is in force from the first day of each calendar month. As of the 1st of July 2017 the basic interest rate is equal to the average arithmetic value of LEONIA Plus reference rate calculated for the working days of the previous calendar month.
2.9. What is LEONIA Plus Reference Rate?
Leonia Plus is abbreviation of LEv OverNight Index Average Plus. LEONIA Plus is a reference rate of all concluded and executed overnight transactions in BGN for all banks licensed by the BNB and branches of foreign banks. As of the 1st of July 2017 LEONIA Plus substitutes LEONIA reference rate which was calculated before. Compared with LEONIA reference rate LEONIA Plus has a wider scope because data are provided by all banks licensed by the BNB and the branches of the foreign banks but not only by a representative panel of banks as was the approach for the calculation of the LEONIA reference rate. Contrary to the LEONIA reference rate that new index is calculated on the basis of transactions that are really concluded. When there are no transactions on the market concluded on a certain day in BGN, the BNB reports “n/a”.
2.10. What are SOFIBOR and SOFIBID?
SOFIBOR and SOFIBID are reference rates that are calculated as a fixing of the quotes of unsecured deposits in BGN, offered on the Bulgarian interbank money market by a representative panel of banks for a set of maturities. The quotes are provided every day by 11.00 a.m. at the BNB. SOFIBOR is an average “sell” rate, and SOFIBID is an average “buy” rate.
2.11. What is LIBOR?
LIBOR is an abbreviation of London Interbank Offered Rate and it is an average interest rate reflecting the interest rates at which the banks are offering unsecured loans on London interbank money market. LIBOR is used as a reference (base) index for determining the interest rate on different banking operations.
2.12. What is EURIBOR?
EURIBOR is an abbreviation of Euro Interbank Offered Rate and it represents the average interest rate at which a panel of banks in the euro area (EU member states where the euro is adopted as a national currency) offer term deposits in euro. EURIBOR is used as reference (base) rate for determining the interest rate on different banking operations.
2.13. What is the principal on a loan or a deposit?
The principal on a deposit or a loan is the amount which is deposited by the client in the bank or the amount agreed/taken as a loan. The interest due by the client on the loan or the amount received as an interest on a deposit depends on the amount of the principal and it is calculated on this basis.
2.14. What is included in the monthly payment that is due on a loan?
The monthly payment due on a loan is the amount paid by the client in accordance with the credit agreement and it should be transferred to the bank’s account or to be paid in cash up to/at a certain date each month. The monthly payment usually includes a payment of a part of the principal and an interest rate payment as it is possible a different scheme for payments to be agreed between the client and the bank when the amortization table is prepared.
2.15. What is the amortization (redemption) plan on a loan?
The amortization plan on a loan contains the amounts of the installments due on a loan and the dates at which they should be paid in the bank.
2.16. What is the maturity of a loan?
The maturity of a loan is the date at which the loan is entirely paid out by the client to the bank. This is usually the date at which the client makes the last installment of the loan in accordance with the loan amortization plan.
2.17. What is the Annual Percentage Rate of Charges (APRC)?
The annual percentage rate of charges – APRC is required to be calculated and announced to the client when concluding a loan. Its calculation is regulated by the Law on Consumer Credit and the Law on Credit Agreements for Consumers relating to Residential Immovable Property. APRC represents the total amount of the loan to the consumer expressed as an annual rate of the amount of the loan granted. APR is an effective annual interest rate and it is higher compared to the announced by the bank annual interest rate. Its calculation includes the interest rate and other expenses paid by the consumer, which are related to the granted loans, namely – interest, other direct or indirect expenses, fees and commissions of any type including those due to the intermediaries for the conclusion of the credit agreement. APRC gives the client possibility to compare the prices on consumer loans granted by different banks at similar conditions regarding the amount, maturity and installments.
2.18. What raises the loan cost to the client?
Except the interest the clients of banks usually pay other expenses on the loan which are in the majority of cases in the form of charges and commissions, namely – a charge for examination of the client’s documents, charges related to the collateral (evaluation, mortgage, notary fees for subscription or deletion of a mortgage or a pledge), charges for granting and managing of a loan, charges for an engagement in case of an overdraft or a credit line, compensation in case of early payment of a loan, insurance premiums related to the loan, etc. In order to evaluate the full weight of the loan expenses, the consumer should get information not only on the applied interest rate or APRC but also for the other expenses related to granting, servicing and repaying the loan.
2.19. What does the debtor’s credit rating show?
The credit rating of the debtor is an estimation of the client’s solvency, e.g. the ability to service his/her duties accurately and on time as different factors are reflected. The credit rating can be determined by an independent internationally recognized credit rating agency (Moody’s, Fitch Ratings, Standard & Poor’s), by a Bulgarian credit rating agency or it can be determined by an internal rating system of the respective creditor (bank). Credit rating is expressed in a short and easy way, e.g. AAA rating of bonds means that the issuer has a high ability to meet his financial duties.
Households’ net financial assets are very important when defining households’ solvency.
2.20. What are net financial assets?
Net financial assets are the difference between financial assets and financial liabilities of households. Households’ financial assets include cash, deposits, securities, investment funds, payments to obligatory and voluntary pension funds, insurance, etc. Households’ financial liabilities include loans, e.g. overdraft, home loans, consumer loans, mortgage loans, and other loans, financial leasing, credit cards, as well as other loans granted by banks and non bank financial institutions.
*This information has only educational purpose.