The personal loan: characteristics, rates, repayment


A personal loan is a form of consumer credit. Not assigned to a particular purchase and for an amount of 200 to 75,000 euros, it is reserved for individuals.

What is a personal loan?

personal loan is a consumer loan that the borrower uses to buy what he wants, without having to justify the allocation of funds to a specific project. It is thus opposed to assigned credit, another form of consumer credit. The personal loan can, therefore, be taken out for any type of use: cash needs, purchase of capital goods (furniture, household appliances, automobile, etc.), or services (works, travel, etc.). Its amount must be between 200 euros and 75,000 euros.

It is possible to take out a personal loan from a bank, a specialized credit organization, or via a broker. Since the customer does not have to justify his purchases, the subscription is simplified and often makes it easier and faster to grant credit. However, as with any consumer credit, the procedure must respect a certain formalism, in particular, to protect the consumer.

Therefore, the personal loan contract must be a contract drawn up in writing (or on a durable medium) and includes a box containing the essential characteristics of the loan, in particular: duration, rate, amount of the monthly payment, possible insurance, additional costs. The contract must also include a detachable form so that the borrower can exercise his right of withdrawal, within 14 calendar days from the day of acceptance of the offer.

It is almost always a depreciable loan (at constant maturities in the vast majority of cases) with a duration of 3 months to 7 years, but it is not prohibited to offer personal loans repayable in fine. Most often, the personal loan is granted at a fixed rate but the legislation does not prohibit the use of an adjustable rate.

The borrower receives the loan amount at once, by check or bank transfer, and uses the funds freely.

Do you have to take out insurance for a personal loan?

Like any consumer credit, the personal loan can be covered by borrower insurance, to protect the client and his heirs in the event of death, illness, disability, or loss of employment. Lending institutions generally offer their insurance, but the interested party can completely compete and conclude a contract with an insurer.

It is especially important to know that the regulations do not oblige the borrower to take out insurance. In practice, however, it sometimes happens that a lender makes it a condition for granting the loan. If this is the case, this reservation must be indicated in a clear, precise, and visible manner in all its advertisements. Note that the APR presented in the commercial offers of personal loans does not take this into account.

Early repayment of the personal loan

The personal loan can be repaid in advance, totally or partially, under the same conditions as the assigned loans. The contract may provide for an early repayment indemnity to be paid to compensate the lender.

This indemnity cannot exceed 1% of the amount of the reimbursement (or 0.5% if the remaining duration of the contract is less than 1 year) if the amount of the early reimbursements exceed 10,000 euros per period of 12 months.

However, any compensation may under no circumstances exceed the amount of interest that the borrower would have paid if he had not made this early repayment.

What rate for my personal loan?

Advertisements, any pre-contractual information document, as well as the loan offer must mention the annual percentage rate of charge (APR). The latter represents the total cost of the credit, and as such includes all the costs related to it (nominal rate for interest, administrative costs, etc.). This makes it easy to compare different offers.

The APR offered to the customer will first depend on the amount borrowed and the repayment period. Thus, few monthly payments will lower the rate. Conversely, low monthly payments spread over several years will inflate the cost of credit. Establishments will also tend to offer attractive rates to customers in a comfortable financial situation.

In any case, the APR cannot be higher than the wear rate, a maximum threshold put in place by law to protect consumers.

loan guarantee

Depending on the amount of the personal loan and the risk assessment that will be carried out by the bank, guarantees may be required to ensure the proper repayment of the loan. Since it is an unallocated loan, these guarantees will not relate to the goods financed, but to other goods or assets of the customer (pledge of term account, mortgage, etc.). The guarantee of a person close to the borrower (parent, spouse, etc.) may also be requested.

Personal loan or assigned credit: what are the differences?

Unlike the personal loan, the assigned credit links the purchase of a good or service with the loan, such as the car or work loan. He thus benefits from specific provisions: cancellation of the credit, if the sale is not carried out, obtaining injustice the authorization to suspend the refunding in the event where the bought good, would prove to be defective or in the event of absence of delivery.

The personal loan should be used in cases where the use of an assigned loan is not possible or would be more expensive. 

Generally, credit companies prefer to distribute personal loans rather than earmarked loans, because:

they do not have to pay potential suppliers directly. The management of assigned work loans is cumbersome because the lender must make payments to the craftsman (or even to several of them) and process them in the accounts;

there is no risk of suspension of deadlines in the event of a dispute (poorly done work, vehicle not delivered or not corresponding to that of the order form, after authorization by the Court of Justice).

Note that if the amount of the loan is paid directly by the lending institution to the seller of the property or the author of the provision of services, it is not a personal loan but a loan allocated.

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By Michael Caine

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