"Buy your car only from five euros a day". Hard to resist, right? These striking financing offers that allow you to purchase any good, especially vehicles, for very little money per day or per month are becoming more and more common.
However, according to the banking comparator HelpMyCash.com, these ads hide a dark side: the fee paid is very low because the contracted loan is repaid over a very long period. And that is a very bad deal for the client, because he will end up paying more interest than if he had chosen a higher monthly payment.
But why pay more in interest when the installment is lower? Keep in mind that interest is generated month by month. The lower the monthly payment of a credit, the more months the client will need to pay off the debt. If the return period is longer, interest will be generated for a longer time, so more money will have to be paid for that concept.
With a practical example you can easily see the relationship between a low installment and higher interest. Let's say that a person contracts a loan with an interest of 7% TIN to finance the purchase of a car of 10,000 euros. If he returned the money in ten years, the monthly payment would be very affordable: 116.11 euros. At the end of the term, he would have paid a total of 13,933.02 euros to the financial company, adding capital and interest.
And what would happen if that loan were repaid in a shorter period? For example, if the debt were paid off in seven years, the fee to be paid to the finance company would be somewhat higher: 150.93 euros per month. However, the total to be returned in capital and interest would be reduced to 12,677.85 euros. In other words, this client would save 1,255.17 euros if he paid 34.82 euros more per month.
As you can see, paying a lower account fee is not a good idea, since the loan is more expensive in the long run. For this reason, from the HelpMyCash comparator they recommend agreeing on a return period with the financial company that is not unnecessarily long and that, at the same time, allows paying a monthly payment that is within the financial possibilities of the client.
According to the Bank of Spain, the maximum recommended debt ratio is 35%. In other words, a person should not dedicate more than 35% of their net monthly income to paying the installments of the loans they have contracted. For example, if the future debtor receives a net salary of 1,500 euros per month, the monthly installments of the loan that he signs should not cost more than 525 euros.
The installment of a loan does not depend only on its amount and its term: it is also calculated based on the interest rate applied. The higher it is, the more expensive the monthly payment will be and the more you will have to pay to pay off the debt. For this reason, it is also advisable to look for a loan with an interest rate below the average, which according to HelpMyCash is around 7% TIN.
Also, if you do not want to pay more than necessary, it is advisable to take out a loan without formalization fees and without associated products that make it more expensive, such as insurance. For example, the Cofidis Personal Loan can be a good option, because it meets these requirements and its interest is from 4.95% TIN (5.06% APR). Bank Norwegian's Personal Loan, from 5.99% TIN (6.13% APR) and without additional expenses, can also be an attractive product.
On the HelpMyCash website you can compare all the credits offered in Spain to find the most attractive one.