Salary-backed loan (cessione del quinto)

A salary-backed loan - known in Italian as cessione del quinto - is a type of personal loan available to employees (public or private) and pensioners. It's called this because the monthly instalment is taken directly from your salary or pension, and it cannot exceed one fifth (20 per cent) of your monthly net income. However, employees may apply for a second loan, using up to another fifth, for a total of 40 per cent of their salary. The loan term typically ranges from 2 to 10 years, and it must be covered by an insurance policy, which protects both you and the lender in case of job loss or death.

You can request this type of loan from a bank or a licensed finance company. In some cases, agents from a finance company may be present in shops or showrooms where you intend to make a purchase. Once you apply, the lender will assess your financial situation and decide whether to approve the loan. If approved, they will reach an agreement directly with your employer or pension authority, who will then deduct the repayments automatically.

After the agreement is in place, a portion of your salary or pension will be withheld every month and sent directly to the lender - you don't need to do anything yourself. This continues until the loan is fully repaid.

In general, once you have repaid at least 40 per cent of the loan, you may be eligible to renew it early. This means you can borrow additional money and extend the repayment period - essentially taking out a new loan. However, be careful: this means that a larger share of your salary (up to 20 per cent) will continue to be withheld for a longer period, and you will still have to pay the costs associated with the new loan.

Also keep in mind that part of the new loan will go towards paying off the remaining balance of the previous one.

How much can you borrow?

The maximum amount you can borrow depends on the net amount of your monthly salary or pension.

Pensioners can only use up to one fifth of their pension for this type of loan. Employees, on the other hand, can choose to borrow more by using a second fifth of their salary - this is called a 'double fifth'. In this case, twice as much is withheld from your salary each month. To obtain a double fifth, you need to sign two contracts: one for the salary-backed loan (cessione del quinto), and another called a 'payment delegation' (delegazione di pagamento). Your employer is legally required to accept a cessione del quinto request, but has the right to refuse a request for a delegazione di pagamento.

Unlike the salary-backed loan, a payment delegation does not require insurance by law, although the lender may still ask you to take out a policy.

Advantages

A salary-backed loan (cessione del quinto) offers several benefits:

• simple application: you don't need guarantors or additional guarantees - just your payslip or pension statement and the required insurance;
• flexible repayment: the loan term can be extended up to ten years;
• automatic repayment: your employer or pension provider deducts the monthly instalment directly from your payslip and pays it to the lender;
• no specific purpose needed: you don't have to declare the reason for the loan or how you plan to use the money (it is not a 'purpose-tied' loan).
• available even with past credit issues: you can apply even if you've had difficulties repaying loans in the past.

Costs

Before signing a salary-backed loan agreement, make sure you understand the total cost. Always read the information sheets and compare offers on the market using the APR (Annual Percentage Rate) - this is the total cost of the loan shown as a percentage. For example, all other conditions being equal, a loan with an APR of 10 per cent will cost less than one with an APR of 12 per cent.

Don't forget that the cost of the mandatory insurance is also included in the overall loan cost.

Think carefully before agreeing to renew a loan, especially if you're encouraged to do so by the lender, a loan agent or a broker. Always ask for clear explanations about any new loan offer. Also remember that part of the new loan will go towards paying off the existing loan, so you won't receive the full amount as new funds. Your salary will be reduced by 20 per cent for a longer period, and you may end up paying more in interest and fees.

You are not obliged to renew your loan with the same lender. You can shop around and compare whether other banks or finance companies offer a lower APR.

Risks

As with any form of credit, before signing a loan agreement, it's important to ask yourself: Do I really need this money? Will I be able to repay it without difficulty? In particular, a salary-backed loan reduces your net income. Will you still be able to manage your monthly living expenses comfortably?

Always compare offers from multiple banks and finance companies, and consider alternative options, such as a standard personal loan. Bear in mind that, for banks, cessione del quinto is considered lower risk because the instalments are withheld directly from your salary or pension, and because insurance is mandatory. For you, however, it is still a loan - like any other - and it requires careful assessment of whether the monthly repayments are affordable. This helps avoid excessive debt and financial stress.

Your rights and protections

If you take out a salary-backed loan, you are protected by consumer credit regulations, regardless of the loan amount. This means you have the right to:

• withdraw from the contract within 14 days of signing it, without giving any reason. You just need to notify the bank or finance company (right of withdrawal);

• repay the loan early, in full or in part, at any time before the agreed end date. The lender may apply a reasonable charge for early repayment, but only within the limits set by law;

• receive all the necessary information to assess the loan offer before signing the contract. This includes the SECCI form, which summarises key features and costs. After signing, you must also receive regular statements at least once a year showing the progress of your repayments, a settlement statement if you want to repay early or renew the loan.

If you believe the bank or finance company has not complied with your rights, you can:

• submit a complaint to the lender;
• take your case to the Banking and Financial Ombudsman or the civil court;
• send a complaint to Banca d'Italia.