What banks analyze when calculating your loan interest. An Expert's Advice: “Your Credit Bureau Status Is Essential”

Offers displayed in shop windows and on websites always show the minimum interest. What is not communicated transparently is that few customers will actually get it. We asked lending specialists what are the real elements by which banks calculate the final cost of a loan.

Photo: The truth

The interest rate displayed on a bank's website or on a billboard is usually the lowest interest rate that that institution grants, under optimal conditions, to an ideal customer. The gap between that figure and the interest a typical customer will actually pay can be several percentage points, with a significant impact on the total cost of credit over decades. The banks admit, when asked directly, that the final interest “depends on many factors”but without detailing who they are. We asked for a concrete answer from Irina Chițu, director of the financial comparison platform FinZoom.ro.

The advertised minimum interest is a starting point, not a promise

The first thing that Irina Chițu explains is the structure in which bank offers operate. Credit products are not uniform, and the variables are more numerous than they seem at first glance.

“Banks have standard offers, and from that offer they can give interest reductions, commissions or certain bonuses, depending on several conditions or promotions. There are many products. For example, a mortgage can have variable interest throughout the period. It can be fixed interest for 3 years, 5 years, 7 years or 10 years at the beginning, then variable. There can be a better interest for loans granted for apartments with a good energy class, that is, those green loans. Or, if you attach an insurance to the loan, the bank can give you an interest discount. If you transfer your salary or income to the account of that bank, you can get some discounts.” explains Irina Chițu.

The real problem arises when these packages have to be compared. A lower interest rate can be compensated, or even exceeded, by analysis fees applied at the time of granting the loan, by monthly or annual administration fees or by the cost of mandatory insurance. That's why the specialist recommends a single indicator for a fair comparison between offers: the effective annual interest.

“In general, when we look at a loan, we first look at the APR, that is, the total cost of the loan, which includes both the interest and the fees attached. How do you compare all the offers in the market? The APR does exactly that: in one percentage you see the total cost of the loan over the entire period.” says Chițu.

What is bank scoring?

Beyond the type of product chosen, the bank evaluates the profile of the applicant. Each credit institution uses its own scoring system – an automatically calculated score that influences both the decision to approve the loan and the conditions under which it is granted, including interest.

“You can have access to a specific offer also depending on your personal characteristics. The bank's scoring matters in the credit decision. This score includes personal data: whether you are married or not, how long you have been working, how long you have been at your current job. It is a statistical score. The employer is also analyzed. If the employer has not paid its taxes to the state for a certain period, this can affect you indirectly. All the scoring influences the credit decision.” explains the director of FinZoom.ro.

The information provided by the Credit Bureau is added to the scoring, where all the previous financial behavior of the applicant is recorded. “There's also the information from the Credit Bureau. Behavior matters: how much credit the customer has left, how they've paid it off, if they've been late. All of that is taken into account. Based on this behavior, a FICO score is calculated. The higher the score, the better the chances of getting better terms.”adds Irina Chițu.

The practical consequence is that the same applicant, with the same income, can receive radically different offers from different banks.

“The same person can get different offers from different banks. For example, one bank can qualify for 17,000 euros, another for 50,000 euros, and a third can refuse the loan, although the incomes are the same. It all depends on the internal scoring and the criteria of each bank. The scoring can also influence the interest rate at which the loan is granted, depending on the bank's internal policy.” explains Irina Chițu.

The paradox of the debt-free customer

One of the most surprising mechanisms of the bank evaluation affects precisely the category of customers with no credit to the asset.

“A young person might say that he is doing very well because he has never taken out a loan. Paradoxically, this can be a disadvantage, because the bank does not have a history of payment behavior. It does not know how the person will react after taking the loan. That is why it is sometimes useful that before a mortgage there is a history, for example a shopping card in installments without interest, used and paid on time. This way a positive payment history is built.”explains Irina Chițu.

The advance: the higher it is, the cheaper the loan can be

With mortgage loans, the amount paid from own resources at the time of purchase has a direct effect on the cost of the loan. The logic is simple: a larger down payment reduces the bank's exposure.

“The higher the advance, the lower the loan amount and the period can be shorter, if the income allows. A higher advance means a lower risk for the bank, because the value of the loan is lower compared to the value of the property. In such cases, a better interest rate can be obtained. If in the past loans for individuals were standard and difficult to negotiate, now they are negotiated more, precisely because they take into account the guarantees, the advance and the personal scoring, which is a guarantee for bank”says Chițu.

What can an applicant do before going to the bank

Irina Chițu also details a series of concrete measures that any person interested in a loan can take before submitting an application, in order to improve their negotiating position.

“First, payment behavior. The credit bureau situation is key. Both positive and negative information appear there. Positive information includes existing loans, cards and overdrafts. Negative information is 30, 60 or 90 days late in payment,” she explained.

Income plays an equally important role.

“Banks prefer stable incomes. Salaries and pensions are the main incomes taken into account, but income from dividends or rents can also be added, depending on the policy of each bank. A co-debtor can help, especially in the case of a young person with no history. The advance counts a lot. Transferring the salary to the bank account can bring additional benefits. Nowadays, many documents are no longer needed. With the bulletin, the bank can check the income through ANAF and the history through the Credit Bureau”, shows Irina Chițu.

The expert also recommends some precautionary principles to reduce long-term risks.

“It is important to compare the offers at the time, to look at the effective annual interest and the total payment amount, not just the rate or the displayed interest. It is recommended to borrow in the currency in which you get the income, to avoid currency risk, and choose a fixed interest for a longer period if it is advantageous.” mentions the FinZoom.ro directory.

Regarding insurance, Irina Chițu draws attention to the fact that it is not only an additional expense, but can also constitute a negotiating lever. On the other hand, some banks offer a direct interest discount in exchange for attaching such insurance.

“Home insurance is mandatory for mortgages. Life, health or unemployment insurance can also be useful, which can cover installments in the event of job loss or unforeseen circumstances.” concluded Irina Chițu.