Understanding personal loans

Do you need to buy a new car, furnish a nursery for the baby you’re expecting, or redo the patio in your garden? If you don’t have enough money for your plans, or prefer not to dip into your savings, a personal loan could be right for you. But what is a personal loan? Why take one out? And what are the terms and conditions? myLIFE can tell you everything you need to know.

Definition

A personal loan, also referred to as consumer credit, is a loan agreement whereby an individual is provided with a certain sum of money that they must subsequently repay in fixed regular instalments (typically on a monthly basis) over a given period of time. It is not the same as a mortgage, which you would take out to buy a house or flat.

There are two types of personal loan:

• special-purpose loans, which are designed to cover the purchase of a specific asset, such as a car or a piece of furniture, or to fund a renovation project. If you take out one of these loans, you’ll need to provide the lender with proof of purchase or a quote (if the loan was taken out to fund a home renovation project, for example).
• revolving credit, which is not tied to a specific purchase. You are simply given a sum of money without having to say what you intend to spend it on. We’ve already written about this type of consumer credit, so we don’t intend to discuss it again here.

You don’t need to put up any collateral to take out a personal loan and the interest rate is fixed for the duration of the agreement.

Applications for this type of loan tend to be accepted (or rejected) fairly quickly, once your financial profile has been analysed by the relevant financial institution. Another advantage is that you don’t need to put up any collateral and the interest rate is fixed for the duration of the agreement. This makes it a useful solution if you encounter an unexpected expense, for example.

The fine print

The amount you are allowed to borrow and how long you have to pay it back vary from one bank or financial institution to the next. However, our research points to three fundamental principles that apply to most Luxembourg financial institutions:

• Most of the time, the maximum amount you can borrow is under €100,000
• You generally have between 12 and 60 months to repay the loan. This relatively short time period means that monthly instalments quickly mount up if you borrow a lot of money
• Interest rates on personal loans are often higher than they are on mortgages

Up to €672 per year in debit interest can be deducted from your taxable assets in Luxembourg; each person within the tax household can benefit from this deduction separately.

Tax benefits

You can list a personal loan in the “Exceptional expenses” section of your tax return, provided you can supply an annual statement issued in Luxembourg.

Up to €672 per year in debit interest can be deducted from your taxable assets in Luxembourg; each person within the tax household can benefit from this deduction separately.

Certain life insurance premiums linked to your personal loan may be deducted from your taxable income within a limit of €672 per year per person in the tax household. The financial institution offering the insurance policy should be able to provide further information.

A word of warning: the deduction cap of €672 per year per person in the tax household is for all deductible debit interest and insurance premiums combined.

Who is it for?

To reiterate, the criteria used to determine whether or not to grant you a loan are set by the financial institution you’re applying to. To find out whether or not you’re eligible for this type of credit, we recommend that you check the website of the financial institution in question or contact them by phone. In most cases, you will need to be of legal age, receive a regular income (salary, pension, benefits, etc.) and have a bank account.

Who to contact

Banks and lenders are the two main providers of personal loans. The advantage of applying for a loan through your banker is that they know your financial profile and circumstances better and are therefore best placed to support you.

Before taking the plunge, it may be helpful to use a personal loan simulator to find the right balance for you depending on your preferred loan amount, repayment period and interest rate. This will help you to make a plan based on your financial situation.

It costs money to borrow money

We can’t conclude this article without drawing your attention to the fact that taking out a personal loan means accepting risk and liability. As with any form of credit, taking out a personal loan entails accepting a contractual repayment commitment and, in certain circumstances, there is a risk of over-indebtedness. Never forget that it costs money to borrow money.

With this in mind, it’s vital to carefully assess your ability to make repayments. It may be a good idea to take out insurance to cover the loan repayment in the event of unexpected circumstances (dismissal, accident, death, etc.).

Pay close attention to the interest rates you are offered and read your contract thoroughly. Lastly, a loan should in principle never be used to repay another loan. For information and advice on over-indebtedness, contact SICS (Service d’Information et de Conseil en matière de Surendettement).

A special-purpose loan is a form of consumer credit that can be used to meet a specific and relatively limited financial need. Personal loans offer undeniable advantages including fixed interest rates and no requirement to provide collateral. As with any form of credit, you should assess your repayment capacity carefully before committing yourself.