Be careful when taking out a loan
27.12.2022. / 16:02
BANJALUKA – The increase in reference interest rates by the world’s most important financial institutions will inevitably lead to an increase in interest on loans for the economy and citizens, warns the Bank of -Investment and Development of the Republic of Srpska (IRBRS).
The fastest interest rate growth since the introduction of the euro in 2002 is working. The European Central Bank (ECB) raised interest rates by 75 basis points in October and September, and by 50 basis points in July, taking its rates out of the negative zone for the first time since 2014.
In mid-December, the ECB decided on a new increase in the reference interest rate, raising it from 1.5 percent to two percent, which is extremely high compared to interest expectations in Europe and here.
The increase in the ECB’s reference interest rates also leads to an increase in the cost of borrowing. That is to say, the EURIBOR rates are rising, which automatically increases the price of the loan whose repayment is linked to the movement of this European interest rate.
The Association of Economists of RS SWOT recently launched the Financial Literacy project in order to present citizens with the best possible “traps” that are hidden when taking a loan.
This project was also supported by the Investment and Development Bank of the Republic of Srpska.
Dražen Vrhovac, acting director of IRBRS, states that almost everyone in the Republic of Srpska knows that the Investment and Development Bank has the most favorable credit lines for the economy and the population, many people they do not know that the IRBRS does not directly place loans to the population, but that these loans are taken indirectly through commercial banks.
“The best protection against interest rate shocks in a new loan is certainly to contract a loan with a fixed interest rate that remains the same regardless of other interest rates in the market. By contracting this type of interest rate with the bank, loan users are fully protected from interest rate risk.”Vrhovac said.
According to him, a fixed interest rate can carry higher borrowing costs at the time of taking a loan compared to those with a variable rate. However, the real effects of fixed rate debt emerge in the medium or long term, in conditions of high volatility in the financial markets, as it is present today.
“This is precisely one of the reasons why we supported the Financial Literacy project, because as a socially responsible institution we have the obligation to draw the attention of citizens to what needs to be focused on when taking a loan.”says Vrhovac.
He advised everyone who is thinking of borrowing not to overestimate his creditworthiness, in terms of good service of his obligations, and to rely on the possibility of further deterioration of credit conditions in international frameworks. This is especially the case with debts that are realized with a variable interest rate.
Regarding the possibility of further growth of interest rates around the world by central banks, including the European Central Bank, as a measure to alleviate inflationary pressures, it should be pointed out that the Placement Rules of -IRBRS for credit lines also limit the bank’s maximum withdrawal interest rate, so that with the maximum interest margin of the financial intermediary, the interest rate for the end user cannot exceeds five percent, regardless of EURIBOR growth.
“Certainly, this provides security to traders and other users of IRBRS loans, which means that in any possible development of events in the financial markets, they will have favorable credit funds at their disposal. In addition, IRBRS home loans are realized at a fixed interest rate, so that users are fully protected from interest rate movements in international markets throughout the period of repayment, which is up to 25 years.”Vrhovac said.
He adds that one should bear in mind that, in the general case, the suppression of inflation through the reduction of consumption through the growth of borrowing costs can lead to a reduction in general economic activity, and this, in turn, leads to the stagnation of the general economic and social conditions.
“It is precisely in this that the role of development banks in the conditions of the development of the crisis is reflected, which, through the concept of countercyclical action, encourage the maintenance of economic activity and further growth and socio-economic development,” emphasizes Vrhovac. SWOT
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