When we apply for a loan, the bank must assess our solvency (analysing if we’ll able to pay it back, depending on our financial and personal situation), and check whether the product is the most suitable one to cover our requirements. This conduct on behalf of the credit institution is known as responsible lending.
Responsible lending would have a double purpose: protect us as banking customers and ensure the solvency of credit institutions.
Apart from the bank’s obligations, we should also consider certain points before we put ourselves in debt, such as:
- How much money should I request?
We must carefully assess our actual needs, avoiding to accumulate a bigger debt than we’ll be able to pay back.
- Will I be able to pay it back?
To answer this question, it’s important that we make a detailed budget reflecting our expected revenues and expenditures.
- Will I be able to pay the instalments if there’s an interest rate increase?
If we’re taking out a variable interest rate loan, we have to bear in mind that, if there is an interest rate increase, the installments to be paid will also rise. This could put our payment capacity in serious jeopardy. Using our simulators you can obtain an estimate on how installments may vary.
- Is this the most suitable loan?
Compare between the market’s different offers. It’s important to check the APR, which reflects the actual loan’s cost, and remember: the lower the APR, the lower the cost.
- When will I finish paying my loan?
The loan term is a key factor. If the item we took out the loan for is something with a certain lifespan, like a car, the loan’s term should never exceed the item’s lifespan.