Installment financing is one of the most used and requested forms of loan. In this case the loan is provided by a financial operator (it can be a credit institution or a bank) to a subject (whether private or corporate) who undertakes to repay – by paying installments – the capital plus interest. Basically, installment financing belongs to the category of “targeted loans” very much in demand by Italians. The demand for installment loans is set to increase due to the difficult economic situation that our country is going through. Many Italians are unable to make an important purchase by drawing on their finances and are turning to finance to get cash immediately.
And, in fact, the reasons that push Italians to apply for installment financing are generally purchases of common goods or services such as cars, motorcycles, furniture, medical expenses, ceremonies and training.
As a rule, the documents requested by the banks or other financial institutions are: the tax code, a valid identity document (identity card, passport, driving license) and the last pay slip or tax return.
The loan installments: what do they include?
When signing a loan installment contract, you must pay close attention to the clauses in it. Normally, however, the monthly installments that the applicant will be required to pay to the provider include three different elements:
- the capital
- the interests
Usually the installments have a constant amount, they must be paid periodically (usually every month) and they include both the disbursed capital and the interest: normally, with the payment of the first installments, a good part of the interest is returned rather than the capital .
The installments include (in addition to capital and interest) also ancillary expenses. There is also a maximum limit on the financeable amount governed by the consumer credit legislation.
We are talking about a limit of € 30,987,410.
Furthermore, installment loans can have a duration of 12, 24 or 36 months.
Installment financing: payment methods for installments
The applicant can decide to pay monthly installments using different methods. In particular, you can pay them:
- by bank transfer
- Bank RID (Direct Interbank Report, or debit on current account)
- credit card
- salary assignment
Installment financing: the amortization plan
Installment loans are obviously assisted by the amortization plan which, in fact, is a program for extinguishing the loan. It is drawn up by the creditor and the debtor and must be approved and signed by both parties. The function of the amortization plan is to indicate – in a detailed manner – the installments that the debtor will have to repay to the institution that has provided the loan. Sometimes, especially in specific loans, a pre-amortization period or an initial period during which the debtor may not pay the installments may be agreed and provided for in the contract. In these cases the parties can agree to pay the first installment after a few months from the purchase made.
Furthermore, installment loans in targeted loans tend to have a fixed interest rate which is expressed by two values:
– the TAN (nominal annual rate); – the APR (annual percentage rate): great attention must be paid to this indicator. The APR, in fact, summarizes the total cost of the loan, including also those incidental expenses connected to the loan contract (such as, for example, the stipulation of an insurance).
As a rule, the installments making up the amortization plan are constant and are composed – as we have just pointed out – of an increasing share of capital and a decreasing interest rate. The mechanism is clear and simple: in the first monthly installments the interests rather than the capital are included in maximum part. This anticipation of interest allows banks and credit institutions to protect themselves given that the majority of interest is paid and paid with the first monthly installments. Some banks grant a pre-amortization period , ie an initial period during which it is possible not to pay the installments (for example, the payment of the first installment begins 12 months after the purchase of the good or service).
Installment loans: early redemption
It is always possible to pay off a loan early: it is the law that establishes it. The same law also states that the clauses – present in a loan agreement – with which the parties agree to exclude early termination are not valid.
How to pay off the loan installments in advance? Well, in these cases the debtor will have to do nothing but pay the residual capital, all the charges accrued up to that moment and the interests.
In some contracts the “early termination penalty” may be present: this expenditure, by law, cannot exceed 1% of the residual capital.