They may seem “all the same”: similar mechanisms, similar procedures, the same purposes. In reality, they are different from each other.
And the differences are neither few nor insignificant. We are talking about loans.
There are many types of loans, each of them with specific characteristics.
The first, substantial element of diversity between the various types concerns the interest rate., that is to say the cost of borrowed money (in even poorer words, the return that the borrower lends): which may be higher or lower depending on the financial or paying bank (attention then to the hidden and written clauses in small contracts!)
To get a clearer idea of these differences, just compare the values measured by the Bank of Italy , which publishes a document every three months that collects the actual average global rates of the main loan categories. Taking a look at this document, we find that one of the loan categories with the lowest average APR (2.45%) is the mortgage. Why is the value so low when compared to other forms of loans? Because mortgages are considered low risk loans , since the security required is solid (the house itself for which you are paying the loan which, in the case of insolvency of the debtor, may become the property of the bank). Not to mention the fact that, especially in Italy, anyone who requires a mortgage is investing with a great emotional load, and will do everything to honor the commitment made by paying the installments on time, so as to avoid losing the property.
The level of risk is, in fact, the most important variable in determining the interest rate of a loan . If the bank (or the lending institution) believes that a particular type of loan is secure – because the debtor provides solid and real guarantees of repaying the debt – and therefore the level of risk is low, it is accordingly also the interest rate. On the contrary, if a loan is not protected by strong guarantees, the level of risk rises, and the interest rate will be higher.
But what is the average APR of the loan categories indicated in the Bank of Italy document? Let’s take three of them, the most widespread ones:
- Loan finalized: the average APR is 9.64% ;,
- Personal loan: the average APR is 10.2%
- Revolving cards: the average APR is 16.15%
We analyze the characteristics of these loans and try to understand together the reasons for their values.
A finalized loan is a form of financing strictly linked to the purchase of an asset , such as a television, a washing machine, a car. In this type of financing, the money is not credited to the customer but to the company that sells the product / service for which the loan is requested.
If, for example, you want to buy a car , but you do not want to pay it all at once, you can ask the dealer for a loan with payment in installments . In principle, it will not be you who decides which funding agency you want to refer to: car manufacturers usually rely on a specific financial institution and, when a client requests a loan, they themselves provide the loan application to the credit institute reference. The funding body will evaluate the application and decide if there are conditions to grant the loan. In the event of a positive response, the sum will be paid directly to the concessionaire : in fact, it is as if it were advancing money on behalf of the client, who will then have to repay the loan (of course, with any interest) directly to the bank through monthly installments, often with direct withdrawals from the current account.
In addition, in the case of targeted loans, it is possible that you will be offered a zero rate loan : in this case, the borrower does not have to pay interest to the institution that provides the loan. Zero-interest loans are possible thanks to agreements between stores and financing companies: for example, the retailer undertakes to offer a customer who wishes to purchase a home appliance a zero-interest loan instead of a discount on the product.
Unlike the finalized loan, a personal loan is not tied to the purchase of a specific asset: this means that the requested sum is credited by the lender body directly to the loan applicant, often directly to his checking account. An example of a personal loan is that which may be required, for example, for the renovation of the house.
This form of financing, which is growing strongly in Italy, presents slightly greater risks than the loan because it is impossible to control the actual purpose of the loan.
And this is precisely one of the reasons for which the average rate is 10.2%: a value slightly higher than that of loans aimed at (9.64%) , but still very similar.
A different argument must be made for the revolving card , an instrument issued by a bank, or another credit institution, which allows payments in installments – with related interest – of purchases made with the card itself, regardless of the availability of money present on the bank account.
It is a very accessible financial instrument, which requires little guarantees from the client. Moreover, the continuous availability of money means that customers use the revolving card without having the actual perception of what they are spending. The result? The maximum limit of exposure to the bank is exceeded and the maximum overdraft fees must be paid. Very high risk and, consequently, interest rates to the stars: Banca Italia reports that the average APEG of revolving cards is a good 16.15%.
This is why the main types of loans have different interest rates. But always remember the most important thing: never request a loan if you’re not sure you can pay the installments on time . Maybe at the beginning you will not have problems but sooner or later the nodes will come to the comb and you will be subjected to negative reports in databases and also heavy cost increases. Contracting only sustainable debts is the only way to sleep peacefully.