Loan Products*
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. 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.
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.
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.
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.
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.
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. EURIBOR 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.
8. 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.
9. 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.
10. What is included in the monthly payment that is due on a loan?
The monthly loan installment is a contractually agreed amount that the borrower owes each month and which the bank automatically collects from the available balance in the specified current account or by another agreed-upon method, on a set due date. 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.
11. 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.
12. 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.
13. What is the Annual Percentage Rate of Charges (APRC)?
The Annual Percentage Rate of Charge (APR) is an indicator of the total cost of credit for the consumer, expressed as an annual percentage of the amount of the credit granted. It is calculated and must be provided to the client during the pre-contractual phase when the loan is being negotiated, with the calculation method regulated by the Consumer Credit Act and the Act on Consumer Real Estate Loans. The APR includes the annual interest rate on the loan, as well as all other costs borne by the consumer that are known to the lender at the time of the contract conclusion, including fees and commissions. For that reason, the APR is usually higher than the nominal annual interest rate. The APR allows consumers to compare the cost of different consumer loan products under the same conditions regarding amount, term, and repayment method.
14. What raises the loan cost to the client?
In addition to the loan interest, clients also pay other costs, which may take the form of bank fees and commissions, as well as expenses to third parties related to the granting, securing, servicing, and repayment of the loan. Such costs may include fees for document review, loan disbursement and management fees, commitment fees for overdrafts and credit lines, fees for renegotiating terms, appraisal and collateral costs, notary fees for registering or removing a mortgage or pledge, as well as insurance premiums, where applicable. To assess the full financial burden of the loan, the client should receive information not only about the interest rate or the Annual Percentage Rate (APR) but also about all other costs associated with the granting, servicing, and repayment of the loan.
15. 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.
16. 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.
