Consumer loans

What is a consumer loan

A consumer loan is a loan to an individual for personal needs. As a rule, it requires no collateral or guarantor: the lender decides based on your income and credit history. Consumer lending in EU countries is governed by national consumer credit laws based on a common European directive, so the main rules are similar across countries.

A consumer loan most often means a standard unsecured loan, but there are other forms too:

• Unsecured cash loan — a fixed amount repaid in monthly instalments.
• Credit line and credit card — you are given a limit, and interest is charged only on the amount you actually use.
• Buying in instalments — a loan for a specific product, arranged directly in the shop.

Loans with a very high interest rate deserve a separate mention: they often include fast loans for small amounts. They also count as consumer loans but cost considerably more.

What you can use a consumer loan for

A consumer loan is usually not tied to a purpose: you decide how to spend the money and don’t have to account to the lender. People use it to buy a car or household appliances, renovate a flat, travel, pay for medical treatment and cover other personal expenses. This is what sets it apart from a mortgage or a secured car loan, where the money is issued to buy a specific asset that also serves as collateral.

Why the rate is higher than for a mortgage

The rate on a consumer loan is usually higher than on secured loans. The reason is risk: if the borrower stops paying, the lender has no asset to cover the loss. In addition, consumer loans are issued for smaller amounts and shorter terms, and their arrangement costs are higher relative to the loan amount.

Who can get a consumer loan

Any adult can apply, but that does not mean everyone will be approved. By law, the lender must assess your creditworthiness before granting a loan and follow responsible lending principles — that is, it must not grant a loan that the borrower is unlikely to be able to repay.

In practice, this means you need a regular income that covers both your usual expenses and the loan payments. Age limits and other requirements vary between countries and lenders, and for larger amounts or a poor credit history the income requirements are usually stricter.

Loan consolidation

If you have several loans, you can combine them into one: a new lender provides an amount large enough to pay off your old debts, and from then on you pay only that lender. Sometimes the lender transfers the money to your previous lenders itself; sometimes you have to do it — this is stated in the offer.

The benefits of consolidation: one payment a month instead of several, easier control of your finances, fewer separate fees, and the new loan’s rate may be lower than that of your old small loans.

But there is an important caveat: the monthly payment often falls because the new loan is taken out for a longer term. As a result, the total amount you pay may even increase. So compare not only the monthly payment but also the total amount you will repay on the new loan with the remaining balance of the old ones. And don’t take out new small loans after consolidating — otherwise the debts will build up again.

AllCredits does not consolidate loans itself, but the catalogue includes lenders that offer consolidation. Compare their terms in advance and apply to one or two companies rather than all at once: every application is checked against your credit history. Learn more in the article “About credits consolidation”.

What is the annual percentage rate (APR)

The annual percentage rate, or effective rate, shows the full cost of a loan as a yearly percentage. It includes not only the interest for using the money (the nominal rate) but also mandatory costs such as arrangement, service and account fees. That is why the APR is almost always higher than the nominal rate.

Calculating the APR by hand is difficult: it is not simply the rate plus the fees but a calculation using a special formula that takes into account the size and timing of all payments. But you don’t need to calculate it yourself: in the EU, lenders must state the APR in their offer and in loan advertising. It does not include costs you can avoid, such as late payment penalties. Learn more in the article “What is the Annual Percentage Rate?”.

How to compare offers

The rate on a consumer loan is almost always set individually: it depends on your income, credit history and how a particular lender assesses risk. So the same person can get very different terms from different lenders, and it is not worth taking a loan from the first lender you find.

When comparing, look first at the APR and the total amount to repay — they show the real cost of the loan. The larger the amount and the longer the term, the more even a small difference in the rate matters: on a loan of several thousand euros over several years, it adds up to a noticeable sum. You can estimate your monthly payment with the loan calculator, and learn more about comparing offers in the article “About credits comparison”.

In the AllCredits catalogue you can compare, free of charge, the terms of lenders offering consumer loans in different countries. To learn how to use the catalogue, see the catalogue guide.