## The interest rates on personal loans

ALL YOU NEED TO KNOW:

• Interest rates or the price of money in finance
• Typical fees for consumer loans
• The average interest rates on personal loans
• What are the types of loans for?

## Interest rates or the price of money in finance

We can define the interest rate as the price that has to borrow a certain amount of money and return it over a certain period or as the percentage that is applied to the money granted. It is up to us to decide if we are willing to pay the amount of money that would be generated in interest for having a certain amount of capital for a period of time.

T he money, as each product or service being marketed at present, has a price and it depends on the market. As with any other good, the price of money changes according to time and other variables. This price is determined by the market itself, since it will depend both on the supply and demand of financial services and on the risk profile of each applicant (the higher the risk of default, the higher the applied interest, for example). In addition, we must bear in mind that there is no single interest rate for all products, but there are multiple rates that vary depending on the conditions established by financial institutions.

## Typical fees for consumer loans

In online personal loans, interest usually ranges between 8% and 9% on average . The interest rates on personal loans, according to the latest data published by the Bank of Spain, put the average APR at 8.61%. When we apply for personal loans we must take into account two indicators: the TIN and, above all, the APR. The first one tells us how much we will pay for the requested capital and the second is an algorithm that also includes other costs associated with the loans, such as the commissions we must pay and the term.

On the other hand, the great majority of mortgage loans currently have a variable interest: Euribor + x%. The Euribor is the price at which banks lend money and is a variable interest rate that depends on several macro-economic factors. In this way, the bank makes sure that the money it lends will never cost more than the money it buys. In the case of other types of loans, it is much more unusual to see loans with a variable interest rate and referenced to indices such as the Euribor, even more so with the low level of this index. However, if we can find interest rates personal loans that are referenced to the Euribor.

## The average interest rates on personal loans

Each type of personal loan is designed to cover different needs or adapted to a specific client profile. Therefore, depending on the credit we hire, the price will be one or the other. Next, we will see what are the different interest rates of personal loans depending on the product:

 Minicréditos Personal loans Credit cards Consumer loans P2P Loans 1.1% daily € 100 to 30 days: € 33 8.83% APR on average according to BdE Payment at the end of the month: 0% APR Deferred payment: 12% – 29% APR 0.5% – 29% APR (according to risk profile) Depending on the offer Usually offered: first 3 months without interest

Knowing the interest rates of personal loans and the purpose for which they were designed, we can choose the different credits that best suits our financial situation.

At the same time and as we can see, for the calculation of the mini-credits we do not use the APR to determine their interests. The reason is that they have a return period that will not go beyond 30 days. For this reason, we say that the APR (Annual Equivalent Rate) is not representative for this type of product, since it is an annual index and we will never return a mini loan in a year.

Currently, it is possible to apply for personal loans with an interest rate of 0% APR for the price war that is taking place in the market. In the case of mini credits, this type of promotions are increasingly frequent, which, in turn, are usually valid only for the first mini loan that we request. In addition, we will have to stick to the specific conditions of the offer that we find (term of the promotion, be new clients …), since otherwise these promotions will lose all their validity.

With credit cards we can also get financing without interest (by choosing the payment at the end of the month), although some allow you to postpone purchases without interest, especially in large stores. These offers are usually given mainly in shopping cards of department stores to encourage consumption. As with minicréditos, we must meet the specific conditions of certain amount or term. On the other hand, currently, we can find several free credit cards, that is, they do not include emission or maintenance fees, although in most cases we will have to commit to certain conditions to obtain them.

Interest-free personal loans are more difficult to find, since they are higher amounts, although it is possible to find credits at 0% APR for specific purposes such as financing the driver’s license, advancing the payment of our scholarship or financing a mobile phone . Of course, these loans without interest tend to be accompanied by great links.

We must take special care with interest-free loans and make sure that 0% refers to the APR and not the TIN. If it refers to the APR, the credit will be effectively free, while if it refers to the TIN, the loan may include additional fees or related products that, although they do not generate interest directly, they will have to pay for the financing contracted.

When looking for and deciding the company, it is advisable to read its clauses and conditions to have full knowledge and control to calculate the final cost of the personal loan , weigh which is the best option and select the company that offers services and advantages according to our economic profile.

## What are the types of loans for?

Money has a peculiarity that differentiates it from other goods and is that over time, it loses value. Therefore, we show below a practical example of this fact that influences our day, the interest rate of the personal loans we hire and our life. Therefore, when someone owes money, it has to compensate for the fact that we do not have liquidity available at the moment, and therefore, the longer it takes to return it, the greater the compensation that must be paid. Actually, the interest rate is used to compensate for two effects:

• The opportunity cost of having the money today , as we explained before.
• Counteract the insolvency risk of the debtor . The more doubts there are that the client returns the money, the more it is demanded in return. Otherwise, no one would invest in operations with risk.

In short, the interest rate will depend on the length of time and the risk faced by the lender when granting financing. Within the risk we must understand, mainly, the borrowed capital and how much more they lend us, more we will pay because the amount of money that the bank puts in risk is greater. Therefore, it is advisable that we try to have a good credit history so that our chances of obtaining a loan with the best possible conditions increase.