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Loan

Loans may sound good at first, since they provide the possibility to buy without delay anything that we otherwise would not have money for. But it is important to remember that it is a loan, which means debt for us, so it is important to pay attention to a few things if we are considering taking up a loan.

What is a loan?

A loan is a financial act, whereby the lender gives money for a pre-determined time to the debtor in exchange for future repayment along with interest. Loans most commonly come from banks. Whenever the bank makes a loan they create new money, which during the process of lending passes on to the lender in the form of debt. This money, however, is not the bank’s, since the generated money ceases to exist after repayment.  This is profitable for the bank due to the interest, since the debtor pays back more money than they borrowed.

What is interest?

Just as there is an interest for bank accounts, there is an interest for loans too. Loan interest is the bank’s return on the money, which can have a fixed-rate or a variable interest rate.  The bank collects the interest together with the repayment instalments.

Loan pitfalls

Loans may sound good at first, since they provide a lot of opportunities that we could not afford from our own money. But here is some advice that is worth reading if you are considering taking out a loan, since sadly many examples show how easy it is to drown in debt.

– Always consider how much you can repay every month. It is easy to think that „Okay, I will be strong from now on, and I will save 50.000 Forints every month”, but doing so for years is inhumanly difficult, and not possible. Plan to be able to repay that money even in the worst case scenario.

– Plan ahead and calculate with the many things that can happen to you in the years you have to repay the debt. And certainly, when you are young, many things happen, from scholarships abroad to having children, so this really requires foresight.

– Purchase term life insurance for at least the loan amount. Even for more than ten million Forints it translates to a few thousand Forints every month, and you can protect your family from paying off your loans in case of an accident or death.

– Do not buy anything without down payment! Always include at least some of your own money, since loans without down payment are too dependent on the fluctuation of the market.

– Do not take out a loan with very low down-payment, whereby in the first 1-5 years you only pay the interest, but not the loan itself. These can be very attractive offers, but because you are not actually paying back the loan itself the extra costs add up to very high amounts (and most people do not calculate with these).

– Besides the interest always check the APR (THM in HUN).

APR

Annual percentage rate, or APR, is numeric representation that shows how much the borrower must pay back in addition to the loan. Every creditor is required to use this indicator.

When calculating APR, the following are used: interest, handling charges, valuation and on-site inspection fee, estate records proceedings costs, and bank account costs. When calculating APR certain costs are not taken into account, such as late payment fees, notary fees, coverage insurance and possibly a guarantee fee – we have to take these into account on our own when consider taking out a loan.

Foreign Currency Loan

Foreign Currency Loan refers to a loan that is not in the official currency of a given country. It is true about all foreign currency loans that payments are done in the currency of the given country, but the loan is registered in a foreign currency.

Foreign currency loans began because of the different base rates for different countries. If we take out a loan in the currency of a country with lower base rate than our own, the interest rates can be lower too.

The dangers of foreign currency loans come from the fluctuation of the exchange rate between the two countries’ currencies. If the currency of the given country weakens, the instalments and existing debt rises; of course, if it strengthens the instalments and debt lowers too.

Student Loans

Student loans are loans offered to students to pay off education-related expenses, such as tuition, or to pay for their livelihood. These loans tend to have a lower interest rate, currently it is the lowest in the country. You can take out a student loan to pay for tuition or to use as you wish. You can start repayments during your studies, but you must start at the latest from age 45, or upon completion of studies.