The cost of credit

What is credit?

In finance, credit can be defined as the provision by a person or organisation of a sum of money in the form of a loan. The organisation or person lending will be called the creditor; and the person (or organisation) receiving the funds will be characterised as the borrower or debtor. The loan issued implies that the creditor must be repaid by the debtor on a due date. Credit allows, depending on the case, to finance a project, real estate, an acquisition, or to cover expenses at a time when you do not have the necessary money in your account. It is essential to clearly define your needs in order to choose the credit that suits you best. Why and how? That is what this article will be about.

How much does a loan cost you?

The first question to ask is how much does a loan cost you?

To a loan, interest calculated from the nominal rate is added, as well as application and guarantee fees. The total cost of the loan thus represents the sum of all monthly payments and all charges borne by the debtor during the term of the loan, subtracted from the amount of capital borrowed. You are a bit lost, aren't you?

The role of the banker and your understanding

Do not worry. All of this will be explained and detailed to you by your banker before you sign a loan contract, for sure. You will thus understand what your loan really implies and will know in advance what to expect, or at least you will understand it in your own way. Your degree of understanding and your choices will depend on your background in the field of finance, or rather, in the matter of credit. This would mean that you should be equipped, in a context of financial knowledge, to be able to make comparisons on the possibilities available to you and thus make effective choices. And since the ability to master the field of finance is not innate, this should mean that you have previously acquired a financial culture and education.

The importance of financial education

You are financially educated if you have knowledge and understanding of financial concepts and risks to make informed financial decisions.

With financial education, you will be able to choose a suitable credit based on:

• the purchase you wish to make,
• the amount you need,
• your personal situation.

Precautions to take with credit

Furthermore, financial education is essential in that you will also be able to take out credit while paying attention to the following details:

• Only use an amount that you are able to repay.
• Do not consider credit as free money, knowing that it can prove to be very costly.
• Compare the different forms of credit to find the one that offers the lowest interest rate.
• Determine the total cost you pay by using credit, that is to say how much your need will cost you with interest.

Conclusion: an informed decision

In order to make informed decisions about taking out credit and everything that it might imply, it is necessary to have a certain amount of knowledge, skills and awareness. And introducing financial education into the lifestyle of individuals, households, start-ups… is the ideal way to predispose them to these conscientious decision-making processes.