Banks provide loans and credit for a wide range of purposes. When deciding on a loan and its terms, the customer’s repayment capacity and the collateral offered are key considerations. A loan can be applied for either in person at a branch or through online banking.
To secure repayment, housing loans are often linked to various protection products, such as interest rate caps or payment protection insurance.
Smaller loans may be granted without collateral, but in most cases, loans are secured. Collateral can be given either as special guarantee or general guarantee. Special guarantee secures only a particular loan, whereas general guarantee covers all of the customer’s current and future loans.
Conditions for granting credit
According to the Finnish Financial Supervisory Authority’s guidelines, banks must grant credit primarily within the customer’s repayment capacity. The Consumer Protection Act also requires that credit may only be granted if the consumer is deemed capable of repaying it. Repayment capacity is assessed using various calculations to ensure that the borrower’s regular income is sufficient for living expenses even after loan servicing costs. To assess creditworthiness, customers are usually asked to provide details of their income and financial situation.
To ensure repayment, the bank typically requires collateral for the loan. Securing loans with collateral also helps banks ensure that they meet their own requirements, as the Act on Credit Institutions obliges banks to maintain sufficient capital adequacy.
Obtaining credit usually requires a clean credit record, and the lender checks the credit applicant’s credit history. If their credit record shows payment defaults, the loan may be denied. A payment default entry usually arises when non-payment has been confirmed by a court decision or an enforcement authority. Before this, the payment has typically been overdue for at least a couple of months, and the individual has received several collection letters.
A payment default entry is removed one month after the debt has been paid and the information has been updated in the credit register. Such entries may affect access to credit, credit cards, insurance, housing or even employment opportunities.
Personal guarantees are less common today. In a personal guarantee, a person undertakes to pay another person’s debt if the borrower cannot meet their repayment obligations. A loan may have, and often does have, multiple guarantors. Banks accept personal guarantees only in specific cases, generally preferring real collateral.
In pledges, the value of pledged collateral determines its ability to secure the loan. If the loan is not repaid, the bank may sell the pledged asset and use the proceeds to cover the debt. Common forms of collateral include housing company shares, bank deposits and real estate.
Loan types
Housing loans
As the name suggests, housing loans are intended for purchasing, building or renovating a home. The property being bought or built usually serves as collateral. In some cases, the state or a partner of the bank may guarantee part of the loan, which means that additional collateral or guarantors may not be needed. For a first home, borrowers can also use an ASP loan.
The ASP system or home savers bonus system is a system based on the Act on Bonus for Home Savers, which allows for the state to support ASP savers in purchasing their first home. The State Treasury advises banks and home buyers on applying the ASP regulations.
An agreement about opening an ASP account is made between the ASP saver and the bank. An ASP account can be opened by individuals aged 15 to 44 who have not previously owned a home. Once the ASP saver has saved at least 10% of the purchase price in the ASP account, the bank may grant an ASP loan.
Student loans
Student loans are intended to help cover living and study expenses both in Finland and abroad. They always include a government guarantee, so no other collateral is needed as long as the government guarantee covers the loan. The interest rate and other loan terms are agreed with the bank from which the loan is taken.
Other consumer loans
Consumer loans are designed to finance both large and small purchases, such as buying a car. They may be secured or unsecured, depending on the lender. Interest on consumer loans is not tax-deductible.
Credit card loans
A credit card loan is an unsecured credit that may be granted by a bank, a credit card company or a secondary lender such as a retail chain.
Costs and repayment
Loan interest and other costs
Customers pay interest to the bank as compensation for having access to borrowed funds. Loan agreements specify the interest rate and payment dates. Loan interest may consist of a reference rate plus a margin (a variable-rate loan), or it may be set as a fixed percentage. Loans may also be split into fixed-rate and variable-rate portions. Another option is an interest cap loan, which has a maximum interest rate for a housing loan. There are also loans with an interest rate collar, in which the interest rate fluctuates within the minimum and maximum levels defined in the loan agreement.
The most common reference rates are Euribor rates or banks’ own prime rates. The margin depends, among other things, on the purpose of the loan: for example, consumer loans typically have higher margins than housing loans.
Euribor is the benchmark interest rate of the euro area money market, short for Euro Interbank Offered Rate. Euribor rates are calculated for periods ranging from one week to 12 months. For a loan tied to Euribor, the interest rate is reviewed at the end of each agreed period – for example, a loan linked to the 3-month Euribor is adjusted every three months.
Prime rates
A prime rate is a bank-specific reference rate. Each bank decides on changes to its prime rate in line with principles agreed with the authorities. Adjustments are mainly based on expected developments in market interest rates and inflation. Loan rates tied to a prime rate change when the prime rate changes, but they tend to be more stable than those linked to Euribor.
Base rate
The Ministry of Finance sets the base rate twice a year. The base rate is no longer used as a reference rate for new bank loans.
Fixed interest rates and fixed-rate periods
The customer and the bank may also agree on a fixed interest rate or a fixed-rate period. A fixed interest rate remains the same for the entire duration of the loan, while a fixed-rate period keeps the interest unchanged for an agreed period of time.
Comparing loan offers
Any agreement for a personal loan taken out for consumer purposes must always state the loan’s annual percentage rate (APR). The APR is intended to show the borrower the total cost of the loan. It is calculated not only on the basis of the loan principal and interest, but also by taking into account the repayment schedule and any withdrawal or servicing fees, such as handling charges or fees for automatic debiting. The APR allows consumers to compare different loan offers.
Loan repayment
When negotiating a loan, the customer and the bank agree on a repayment plan – how and when the loan will be repaid. For private individuals, the most common repayment methods are annuity or equal amortisation. It is also possible to agree with the bank on grace periods, during which the customer pays only the interest on the loan. If the customer fails to make a payment by its due date, late payment interest is charged. For consumer and housing loans taken by private individuals, late payment interest may be no more than 7 percentage points above the reference rate set by the European Central Bank.
The Finnish Financial Ombudsman Bureau (FINE)↗ provides advice to customers facing banking, insurance or investment issues, including loan repayment.
Annuity, fixed equal payments or equal amortisation
With annuity repayment, payments are of equal size, but at first the share of interest is higher and the share of principal is lower. As the loan balance decreases, the interest portion shrinks and the principal portion grows. This means that the first payments are smaller than in an equal amortisation scheme, but the total amount of interest paid over the lifetime of the loan is higher.
With annuity repayment, each instalment remains the same for the length of one interest period. If the reference rate increases during that period, instalments will be higher in the next period; if the reference rate decreases, instalments will be lower.
In a fixed equal payments scheme, the payment amount remains the same for the entire loan term, not just the interest period. If the interest rate falls, the loan term shortens; if it rises, the term lengthens.
With equal amortisation or equal instalments, the same amount of principal is repaid in each instalment, with interest added on the outstanding principal. This means that repayments are heaviest at the beginning when the principal is at its largest, but the monthly payments decrease over time as the loan balance goes down. The size of the monthly payment also depends on the level of interest rates.
Debt collection
If a customer faces payment difficulties, banks always aim for voluntary repayment arrangements before resorting to legal collection. The goal is to agree on a repayment plan that matches the customer’s ability to pay. Such arrangements are beneficial, as it is in the bank’s own interest that the customer is able to repay the loan.
If repayment cannot be agreed, the loan is transferred to collection after reminders. At that stage, collateral may be realised. If collection fails, the unpaid debt is taken to district court, and based on the court’s ruling, it may be recovered through enforcement. Fines, taxes and insurance premiums can be enforced directly without a court decision.