What to know before applying for a loan

Whether you're looking to buy or renovate a home, purchase a car, or simply need extra funds for personal use, choosing the right loan means understanding your rights and responsibilities as a customer and being able to manage your relationship with a bank or other credit provider.

Before visiting a bank, it's a good idea to familiarise yourself with some practical steps that can help you when applying for a loan. You can also find useful information in the Bank of Italy's 'Guides in Simple Language' which cover topics such as mortgages, consumer credit, and the Central Credit Register. These guides can help you prepare for your meeting at the bank and enable you to ask the right questions if something is unclear.

What the bank may ask for

To assess your ability to repay the loan, the bank will need information about your financial situation. This means you will be asked to provide certain documents and possibly guarantees.

More specifically, when you apply for a loan, the lender may ask for:

• personal identification documents, such as a valid ID card and tax code;
• proof of income, which helps the bank evaluate your ability to repay. This varies depending on your employment status – for example, recent payslips and annual tax statements for employees, or tax returns for the self-employed;
• details of any existing loans or credit agreements you are already repaying;
• documents relating to the property to be purchased or renovated, especially if you are applying for a mortgage and offering the property as collateral;
• a guarantor, that is, someone who agrees to repay the loan if you are unable to do so. The guarantor will also need to provide evidence of their own financial reliability. Having a guarantor can increase your chances of getting the loan or may help you obtain better terms.

What documents the bank must give you

Banks and other credit providers must give you certain documents free of charge and in good time. These documents are designed to help you compare different offers and make an informed choice.

One of the most important documents is a standardised and personalised information sheet, which presents key terms and conditions in a clear and consistent way across all lenders. This must reflect current market conditions and be tailored to your specific situation.:

• a Standard European Consumer Credit Information (SECCI) sheet for consumer credit;
• a European Standardised Information Sheet (ESIS) for mortgages.

Understanding the cost of the loan

A key purpose of these documents is to help you compare offers from different lenders and to understand the overall cost of the loan. This is shown by a summary figure called the Annual Percentage Rate of Charge (APR or APRC), known in Italy as the TAEG (Tasso Annuo Effettivo Globale).

The interest you pay is usually the main cost of the loan. It depends on the interest rate, the loan amount, and the repayment period.

However, interest is rarely the only cost. You may also have to pay other charges – for example, loan processing fees, broker commissions, or costs linked to required insurance cover. All of these must be clearly explained to you before you sign the contract and must be included in the documentation provided.

Two more important things to know before applying for a loan

Can you afford the loan?

Your ability to keep up with repayments mainly depends on your expected income over time, after covering your usual expenses. As a general rule, a loan instalment is considered affordable if it does not exceed around 30 per cent of your household income.

Keep in mind that, for the same loan amount, extending the repayment period can reduce the size of each instalment. However, a longer repayment term usually means paying more interest overall.

Don't overstretch your finances. Take time to plan your budget carefully so you understand how much you can realistically afford to repay - both now and in the future. Be sure to consider any other loans you may have, as well as unexpected expenses that could arise over time.

Creditworthiness

It's essential to have a realistic view of your ability to repay a loan over time, because this is exactly what the bank or lender will assess. They will carry out a detailed evaluation of your creditworthiness by looking at your financial and economic situation, as well as that of any co-signers or guarantors.

To do this, the bank also checks your existing credit history in credit databases, such as the Central Credit Register (Centrale dei Rischi) run by the Bank of Italy, and in private credit information systems (SICs), which are managed by specialist companies.