Whether you are new to borrowing or struggling to find an appropriate loan package, we can help you understand what options are available to make an informed decision. Bear in mind you will have to pay interest on what you borrow, which means that the longer the term of the loan the more you will pay in interest. You are also likely to pay fees and charges in connection with your loan.
Whichever loan you ask, the cost of borrowing depends on whether the loan facility is secured or not. If you opt to offer something as security (such as your home or a pledge on an investment or a bank account) to provide collateral, the bank will tend to charge you a lower rate of interest. The more liquid the security being offered the slimmer the rate of interest applicable to your personal loan. On the other hand, if you decide to apply for an unsecured loan, the granting of such facility will be based on your ability to effect the monthly repayments out of your disposable income, your track record with the bank, and any other good record of repaying any previous loans with any other bank.
Consequently, given that no security will be backing the amount borrowed, an unsecured loan will attract a higher rate of interest as it involves the bank in a higher credit risk than a secured loan.
A personal loan is a loan you qualify for based on your credit history and income. Personal loans are sometimes called “unsecured loans” because in most instances there is no collateral to secure a personal loan. Instead, lenders approve personal loans by evaluating your creditworthiness.
How does it work?
Whilst the intentions behind a home loan are rather straightforward, those behind a personal loan are broader. A personal loan may assist you in financing the furnishing of your home; put you in the driving seat of a new car; purchase a new computer system; or maybe take a holiday.
If you are in a steady employment, the bank will normally grant you a personal loan of up to a number of years. The interest rate normally varies but some banks may also offer you the possibility to fix the rate of interest for a certain number of years.
How can I get a personal loan?
In order to get a personal loan, you must go to the credit institution you have chosen and ask for a quote. Afterwards you will be required to provide your passport or ID card, salary payslips and bank statements. The maximum amount of the loan depends on your financial situation and is a subject of further approval by your chosen credit institution. At that stage you should carefully go through the quotes provided, as well as terms and conditions, price list (including Annual Percentage Rate and all relevant fees and charges) to understand the conditions and total costs. After the application form is filled in the decision is either taken within the branch you have visited, or it is sent to the head office of the credit institution. When the loan is approved, the Credit Agreement is explained and then signed at your branch.
Which information do I need before applying for a personal loan?
In order to assist consumers in comparing different offers and reaching an informed decision on whether to conclude a credit agreement, the creditor should provide amongst others the Standard European Consumer Credit Information (SECCI) to consumers containing the following information:
- the type of credit to be provided under the agreement;
- the identity and the geographical address of the creditor;
- the total amount of credit to be provided and the conditions governing the drawdown of credit;
- the duration of the credit agreement;
- the borrowing rate, the conditions governing the application of that rate and any other information related to the borrowing rate;
- the annual percentage rate of charge and the total amount payable by the consumer and any other information related to the APRC;
- the amount, number and frequency of payments to be made by the consumer;
- where applicable, any other charges for maintaining one or several accounts recording both payment transactions and drawdowns;
- the interest rate applicable in the case of late payments, the arrangements for its adjustment, and where applicable, any charges payable for default;
- a warning relating to the consequences of missing payments;
- the existence or absence of a right of withdrawal;
- the consumer’s right of early repayment;
- the consumer’s right to be informed immediately and free of charge of the result of a database consultation in respect of assessing credit worthiness;
- the consumer’s right to be furnished with a copy of the draft agreement free of charge.
The abovementioned information should be provided free of charge, on paper or on another durable medium and all information shall be equally prominent.
Furthermore, the abovementioned conditions should also be included in the final copy of the consumer credit agreement.
Do I have a right of Withdrawal?
You have a right to withdraw from a credit agreement without giving any reasons. Your right to withdraw must be exercised within fourteen (14) running days, either:
- from the day of entering into the credit agreement; or
- from the day when you receive, in writing or on a durable medium, the contractual terms and conditions and information as required in terms of the Consumer Credit Regulations.
You shall notify the creditor about the withdrawal in writing or on a durable medium which should be dispatched before the fourteen day period expires.
Do I have the right to repay the loan before the agreed termination?
You shall have the right to pay the loan in full or in part before the agreed termination (early repayment). In such circumstances:
- you shall be entitled to a reduction of the total costs of the credit consisting of the interest and the costs for the remaining duration of the credit; and
- the creditor shall be entitled to a fair and objectively justified compensation.
You are entitled at any time throughout the duration of the loan to a statement of account in the form of an amortisation table, which shall indicate the instalments payment date and value, as well as disclose the amount of capital and interest paid in each instalment, the total amount paid and the total amount due.
Will my creditworthiness be assessed?
The creditor is obliged to assess the creditworthiness (capability to pay back the loan and any related interest) of the consumer prior to the conclusion of a credit agreement. You should provide sufficient information to the creditor in order to carry out this assessment. A relevant database, the central credit register managed by the Central Bank of Malta, may also be consulted by the creditor.
Creditors shall have access to databases which are available in order to assess your creditworthiness. If the credit application is rejected on the basis of a database, you should be informed immediately, free of charge, of the result of such consultation.
A sum of money borrowed from a financial institution or bank to purchase a residential property for example a house, an apartment etc.
If you’re planning to buy your first house, moving home or staying put and refinancing, you might want to make an in-depth assessment of your financial situation before choosing a specific home loan package.
It important that you ‘shop around’ and see what packages the banks or financial institutions are offering with respect to home loan. The package that you will choose depends on your financial situations given that the amount that the bank or financial institutions can lend you depends on your income and other debt that you already have as well as the lending period i.e for how long you are taking out the loan. You need to get information not only on the interest rate that you will be charged but more importantly on the costs that you will incur both before you sign the contract as well as any other costs you will incur during the term of the loan.
What are the factors to keep in mind and that are important decision making factors:
- The loan amount – how much do you need ?
- Do you also need a loan to furnish your house?
- For how many years – i.e the loan term;
- What type of home insurance do you need? Does it cover both buildings and content or building only?
- Life insurance – what life insurance policy do I need to have in place?
- What are the costs that I will incur – before entering into the contract, during the term of the loan and any other ongoing costs
Which are the types of home loan available?
It important that you ‘shop around’ and see what packages the banks or financial institutions are offering with respect to home loan. The package that you will choose depends on your financial situations given that the amount that the bank or financial institutions can lend you depends on your income and other debt that you already have as well as the lending period i.e for how long you are taking out the loan. You need to get information not only on the interest rate that you will be charged but more importantly on the costs that you will incur both before you sign the contract as well as any other costs you will incur during the term of the loan. This is an important decision to be made, since it is a commitment that you will take for a long period of time.
Classic Home Loan
The most popular type of home loan is what we refer to as the ‘classic home loan’. where the bank grants you a specific amount to be repaid over a period of time together with interest. The loan amount depends on your income; your age and other debt you already have.
Most banks offer two types of home loans – variable-rate and fixed-interest rate loans. The variable-rate home loan is the typical loan taken by the majority of home buyers. Normally the rate to be paid is calculated as a fixed margin over the bank’s base rate. Consequently, payments made by the borrower on the outstanding balance of the loan may change over time when the bank revises its base rate.
On the other hand, a fixed-rate home loan is taken out for a set period of time with a set interest rate. At the end of the fixed-rate period your loan will be converted to a variable interest rate, unless you decide to opt for a new fixed-rate contract, if available. It is important that you know for how many years the interest rate will be fixed and the difference in the loan repayment once the loan switches from a fixed interest to a variable interest rate loan. You need to be provided with this information before you sign the contract with the Bank or financial institutions granting the loan.
If you are looking for a new home but haven’t sold your present house, you may be able to take out a bridge loan. Bridging loans serve to finance the purchase of your new property, pending the sale of your existing property. The bridging loan will then be repaid from the proceeds of sale of your existing property. Normally, interest is paid on a monthly basis.
What are the costs of a home loan?
As a general rule, remember that the shorter the duration of the loan is, the higher will be the monthly repayment amount and the less you will pay in interest over the loan term period. On the opposite, the longer the duration of the loan is, the lower will be the monthly repayment amount however the total interest paid will be much higher.
In terms of the Credit Agreements for consumers relating to residential immovable property regulations, banks are obliged to provide the consumer with general pre-contractual information prior to the conclusion of a home loan agreement.
In fact, we urge you to check the following list of charges that you might have to pay:
- before the contract (e.g. processing fees);
- during the contract (e.g. notary, architect, and registration fees);
- after the contract (e.g. commitment fees and periodic updates of land registry searches);
- early repayment fee;
- when settling the outstanding balance of the loan thereafter (e.g. fees to cancel hypothecs); and
- if you terminate your loan by refinancing it by another bank loan.
Most importantly, in the pre-contractual information given to you, the bank should provide you with the European Standardised Information Sheet (‘ESIS’), which shall contain all the information on the loan, on you and on the institution providing the loan. You may also be asked to sign any forms related to Data Protection since the Bank needs to carry out certain checks before coming to a decision whether or not to grant you the loan and may share your personal data with other institutions for such purpose.
One of the points you can use to compare which Bank you prefer is the Annual Percentage Rate of Charge (‘APRC’), which is the cost you have each year to borrow money, including any fees charged by the institution, expressed as a percentage. The APRC is calculated on the basis prescribed by law and represents the actual cost of the loan. Banks are obliged to provide the client with the APRC of the home loan and you can use this in order to compare the different proposals from the banks.
Think carefully about costs when deciding about the home loan. Also, one has to keep in mind that if interest rates increase, the monthly loan repayment will increase as well.
How can I apply for a Home loan?
Before deciding to purchase a property, it would be wise to shop around to get an idea of how much you can borrow. Banks will normally take your gross annual income as a base to determine the amount that you can borrow. As a maximum, the repayment on your home loan should not normally exceed 25% to 30% of your gross monthly income. The lender will typically ask you to pay an agreed percentage of the purchase price which will usually be up to 10% (the bank will lend you the difference). Therefore, you need to save up as a minimum 10% of the property amount, and the remaining 90% will be covered by the bank.
When you eventually find your ideal property and the best deal on your loan, you will have to fill in a loan application form. At this stage, the bank will ask you for various documentation, such as the following:
- Your I.D. Card/s or passport/s;
- Evidence of income, FS3 forms (overtime and part-time work may not be taken into consideration) and/or tax returns (as the case may be).
- Statements of your bank account, if you bank with other institutions (other than the lending bank);
- Records of any financial commitments (existing loans or credit advances);
- In case of non-residents, copies of evidence of income, settled utility bills, Bankers reference and bank statements are required;
- Architect’s property report and valuation;
- Architect’s estimate of costs (where applicable);
- Building permits, layout plans and site plans (where applicable);
- Preliminary agreement/deed of acquisition;
- Ground rent receipts (if applicable);
- In case of request for a re-finance, copy of sanction letter and loan statements;
- Other documentation as required by the bank.
The bank will also ask for notary checks, in order to assess whether the seller can actually sell the property. Once the searches are done, the notary presents a report to the bank. The costs of the notary is borne by the client. You will also have talks with the Bank regarding the Home Insurance and Life policy that you need to have prior to signing the contract. It is important to discuss any other conditions which the bank may include both prior signing of contract and also as regular submissions.
If your home loan is approved, the bank will issue a sanction letter with the terms and conditions governing your loan. The sanction letter will outline the amount and purpose of the loan, the rate of interest being charged, the monthly repayments, the duration of the loan (which generally tends to be up till the age of 65 years) and the APRC. The sanction letter will also define the legal and processing fees that will have to be paid (if any), early and/or late repayment fees and any commitment fees (if applicable). The type of security required (such as life and home insurance and hypothecs on the property being purchased) will also be clearly explained. Finally, the sanction letter will also include an explanation of the ‘events of default’ and the course of action that will be taken by the bank in such instances. It is important that you go through the sanction letter, especially the repayments section to check that the information is correct.
If you decide not to take a loan with a bank after a draft sanction letter has been issued, your bank may decide to apply a fee for the administrative work it incurred for processing your loan application, for example to repay the legal fees for searches carried out by the bank. Double check with the bank about this charge to avoid surprises.
Pre-Contractual Information (HOME LOANS)
The General tariff of charges provides information in a standard format. Borrowers may be offered different terms and conditions tailored to their individual situations. The lender, once it has received information on the borrower’s needs, financial situation and preferences, provides the borrower, free of charge, with the European Standardized Information Sheet (ESIS). This form sets out the information on the customized offer that the you can use to compare with other offers available in the marketplace. A model of the ESIS can be found via this link.
You must be given the ESIS without delay, before committing to any loan contract or offer. The ESIS must also set out the terms and conditions of the contract based on the borrower’s characteristics and needs.
Before signing the loan agreement, you have the right to a reflection period of at least 7 days to compare the different offers, to consider their terms and conditions, and to make an informed decision.
What happens if I don’t pay my instalments regularly?
In case of a home loan, the bank can exercise the right to repossess your property if you do not keep up with the payments on the loan. However, repossession of property is exercised as a last resort.
Before resorting to this measure, the bank usually tries to follow the following procedures:
- Ask you to settle his/her arrears from an account which you may hold with the bank;
- Offer an alternative repayment arrangement to better suit your circumstances;
- Ask you to liquidate assets, to reduce the amount due to the bank.
The bank can also agree to a repayment moratorium period within which you will be able to sell assets/property over a period of time.
If you fail to co-operate towards the repayment of the debt, the bank will proceed with legal action to protect its interests.
Comparing Loans using APR
APR stands for Annual Percentage Rate whilst APRC stands for Annual Percentage Rate of Charge. The APR is a requirement to be provided in the case of personal loans and credit cards, whereas the APRC should be provided for mortgages.
How does it work?
They are a way to compare offers, but not to calculate monthly repayments or instalments as they include any additional fees you’ll have to pay and the frequency with which interest is charged on your borrowing.
APR and APRC are expressed as a percentage of the amount of the loan granted and, usually, the lower they are, the better the deal for the borrower.
In simple terms, the APR and the APRC are not the interest rate charged by the bank or whoever is giving the credit. It is a practical way of comparing between different offers. If you intend to use the APR or the APRC to compare offers, make sure you compare like-with-like, and exclude variables which should not be taken into account.
The following example might give you a better understanding of how it works:
APR used to compare rival competitor offers on a like-for-like-basis.
Loan A is granted with 6.5% interest rate whilst a loan B is agreed at a lower rate of 6%.
At first, loan A appears to be more expensive than loan B. However, loan A’s additional costs (mainly the annual fee) are far lower those applied for loan B. In the end the total cost of borrowing for loan A is lower than for loan B.
What is excluded from the APR/APRC calculation?
All credit agreements should have a statement of the annual percentage rate of charge and a statement of the conditions under which the APR may be amended.
In the APR/APRC calculation, the following are excluded:
- Charges payable by the consumer if he does not comply with his contractual obligations;
- Charges to transfer funds and charges for keeping an account;
- Membership subscriptions to associations or groups arising from agreements separate from the credit agreement;
- Charges for insurance or guarantees except where these are imposed by the creditor;
- In the case of home loan agreements, any charges payable to persons other than the creditors; and
- Charges which would only be payable where the credit is not utilised, or only partly utilised, or where the customer requests a rescheduling of payments, or where the customer repays early.
An overdraft is a facility arrangement under which a bank extends credit up to a maximum amount (called overdraft limit) against which a current account customer can write cheques or make withdrawals to cover short term cash flow needs.
When is it used?
If you don’t need to borrow for a specific purpose but you need to finance your day to day expenses, an overdraft facility might be the solution you are looking for. Keep in mind however that if you go overdrawn without your bank’s authorization, the charges are likely to be high. Your bank may also refuse to honour cheques you write or refuse to pay standing orders and charge fees for each refused transaction. It may also charge additional administration fees.
What is the difference between an overdraft loan and a personal loan?
Unlike a personal loan, in an overdraft arrangement the borrower will not have to make fixed monthly repayments. An overdraft is a type of revolving facility where money is available for re-borrowing, and interest is charged only on the daily overdraft balance. The repayment on the overdraft balance is flexible as after all the amount utilised needs to be paid back. It is, however, a demand facility as well – the facility can be cancelled at any time by the lender at its discretion (often referred to as ‘called’), without any warning notice or explanation and hence the balance will have to be repaid back at once.
Overdrafts are subject to Bank reviews on a regular basis for which updated documentation may be requested by the Bank. Upon these renewal reviews, you are charged a renewal fee.
Independently of the type of credit you decide to apply for, make sure that you ask this question to yourself first: ‘Can I afford it?’ It is important to consider your earnings and other expenses before you commit yourself to a loan.