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Many people need to borrow money at one stage or another in their lives – for an apartment, a car, other more expensive purchases or unexpected expenses.
When we borrow money, we often read loan agreements, which specify the main terms and conditions – the interest rate applicable to the loan, the final price of the loan, etc. Different terms are often confused, for example, quick loan, line of credit.
Donata Stoškuvienė, head of customer experience management at a digital financial services company, urges you to pay attention to financial conditions first.
“Understanding basic financial terms is very important when dealing with your personal finances. We probably didn’t learn most of them in school, but sooner or later life forces us to face many of them,” she notes.
D. Stoškuviene lists some key terms that you need to understand when managing your personal finances responsibly.
EURIBOR (European Interbank Market Interest Rate, English Euro Interbank Offered Rate) – average interbank interest rate at which banks are willing to lend funds in euros to other banks.
“Simply put, it is the price banks have to pay each other for lending money to each other. Depending on how many people are willing to borrow and lend money, this price can change daily. EURIBOR is also a benchmark interest rate for the Eurozone. The EURIBOR is calculated and published by the European Banking Federation,” says D. Stoškuvienė.
Annual interest rate (APR) – an interest rate expressed as a percentage that indicates the amount of interest per year on the borrowed amount (other than interest, no other fees are included in this indicator). Interest is the price the borrower pays the lender for the money borrowed. For example, if the customer borrowed 100 euros with 5% interest. Annual interest rate, meaning he pays 5 euros in interest every year.
The general annual interest rate for consumer loans (BVKKMN) is a percentage expression of all costs associated with a consumer loan. BVKKMN displays the total cost of the loan as a percentage of its amount. This rate includes the annual interest rate, commission, monthly administration fee and other fees charged by creditors. The BVKKMN shows how high the actual cost of the loan will be for the customer.
The total amount paid by the recipient of a consumer loan (BVKGMS) is a number that indicates the exact cost of the loan. It is related to BVKKMN: both indicate the actual cost of the loan. However, BVKKMN is expressed as a percentage, while BVKGMS indicates the exact amount that must be repaid to the creditor over the entire contract term.
A quick loan (or quick loan) is a small amount of money with a relatively short repayment period. Such financial services are offered by consumer credit companies. The customer can receive the required amount of money in a dozen minutes, and to determine his creditworthiness it is enough to answer a few essential questions about his financial obligations and income. Although credits are useful in difficult situations, it is important to use them responsibly.
A line of credit is a form of short-term (usually lasting up to 1-2 years) loan, formalized by a banking agreement, according to which the bank provides the client with a loan in an amount not exceeding the established limit (the maximum amount) possible debt to the client the bank). To cover the lack of working capital, companies are usually granted a line of credit.
“The recipient of the credit line has the right to borrow, repay and, if necessary, re-use the loan in accordance with the procedure established in the contract and up to a maximum of the established limit. According to the credit line, he can freely use the loan funds throughout the entire loan term, but must repay the entire loan amount at the end of the term. He pays interest on the credit line every month,” explains D. Stoškuvienė.
Credit history is a historical summary of an individual’s credit information. The worse the credit history, the worse the person’s credit options are. A customer with poor creditworthiness pays higher interest rates or can no longer get a loan from credit institutions at all. Credit history is important for both individuals and legal entities.
When borrowing money, the expert recommends reading the contracts carefully and not confusing the above conditions.
“The better people’s financial literacy, the better and cheaper financial decisions they make,” emphasizes D. Stoškuvienė.
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