You may not know it, but the majority of credits, be it consumer loans or real estate loans, are Payday loans. In the banking landscape, this is the most common. To better understand what distinguishes it from other forms of loans: mortgage, bridge loan, loan in fine, loan regulated, etc., let’s do a survey of the subject.
Payday loan: what is it?
Operating in a fairly simple way, the amortizable loan is a professional or personal loan in which the borrowed capital is amortized over time. At each monthly payment, the borrower repays a portion of the principal and interest at the same time . The repayment period is thus fixed in advance.
Difference between fixed rate loan and floating rate loan
When repaying a Payday loan, interest is calculated on the outstanding capital. But, the borrower has the choice between a fixed rate loan or a variable rate loan. A choice that is not obvious, because it depends on the duration of the loan and the evolution of the market.
Fixed rate loan
By choosing to take out a fixed rate loan, the borrower will not have any surprises. The interest rate remains unchanged from the beginning until the end of the loan. Thus, it can easily project in the long term. The fixed rate loan is especially recommended in a period of rising interest rates.
Variable rate loan
If the borrower opts for a variable rate (or reversible) loan, this means that the interest rate will adjust downward or upward and the interest amount will be recalculated accordingly. The variable rate loan is therefore interesting in a period of falling interest rates. In concrete terms, the monthly payments will decrease compared to the previous month.
What you need to know about monthly payments
In general, the repayment term is monthly. However, it can be quarterly, semi-annually or annually. In any case, following the logic, monthly payments are fixed if the borrower chooses a fixed rate amortizing loan. And they are variable if the borrower chooses a variable rate amortizing loan.
However, it is the loan term or the maturity amount that adjusts to the new rate changes.
Case of adjustable monthly payments
The loan with a constant and degressive maturity is not the only possible loan method. Beneficiaries can also opt for a repayable loan with a flexible maturity, especially if the budget is random. Thus, for the duration of the loan, the amount of monthly payments may be increased in case of significant cash inflow. This will result in a shortening of the repayment term. Conversely, the amount of monthly payments can be reduced in the event of financial difficulties with a loan period that is lengthened.
Payday loan: what are the benefits?
The cost of credit
Not insignificant asset, this type of loan is cheaper on the market. Compared to the loan in fine, the cost difference is significant. For example, for a loan of € 100,000 at 3% over 10 years, the interest on the amortisable loan would be around € 15,700. For a loan in fine , this amount could double.
In addition, the Payday loan does not always require borrower insurance, but rather a guarantee to secure repayment.
Ideal for large projects
The Payday credit benefits those who wish to finance a long-term project. For example, buying real estate, whose value is quite substantial.
The possibility of renegotiating down the interest rate is beneficial to the borrower. It is the same for the reduction or increase of the amount of monthly payments. This would allow him to better manage his budget.
Be that as it may, before choosing a credit formula, one should always consider its banking, fiscal and fiscal capacity so that the borrower can engage calmly.
Payday loan: what are the disadvantages?
The first disadvantage of such a loan type is at the beginning of the repayment period. At the first maturities, the interest is quite high, and in return, the repayment of capital is low. Moreover, for a particularly long loan period, it must be said that the interest paid at the end of the contract is quite substantial.