Personal loan

A personal loan is one of the most common ways to borrow money when you need cash, because it is flexible and can be used for many different purposes.

It is considered an 'unsecured' or 'non-purpose' loan, which means it is not linked to the purchase of a specific product or service.

Key features of a personal loan

1. The amount you can borrow with a personal loan depends on your needs, the offers available from your bank, the Post Office or another authorised lender, and-most importantly-your ability to repay the loan, also known as your creditworthiness. Your creditworthiness is assessed based on your income, your existing financial commitments, and your credit history, as recorded in public databases (like the Bank of Italy's Credit Register and private credit reference agencies.
2. Repayments are usually made in fixed monthly instalments, with the full repayment plan agreed when the contract is signed.
3. You can agree the loan duration with your lender, but you should carefully choose a timeframe that suits your financial situation. A longer loan term will reduce the amount of each instalment but increase the total interest paid over the life of the loan.

Advantages

Personal loans offer several advantages, starting with flexibility: the money can be used for a wide range of purposes-such as home improvements, buying a car, planning a wedding, or covering unexpected expenses like medical bills. They can also be used to consolidate other debts into a single monthly payment, which may reduce overall costs. If you choose a fixed-rate loan, your monthly repayments will stay the same, which helps with budgeting and financial planning.

Costs

A key measure for understanding and comparing the total cost of a loan is the APR (Annual Percentage Rate)-referred to in Italian as TAEG (Tasso Annuo Effettivo Globale). The APR includes both the interest rate and additional charges, such as application and processing fees, direct debit or payment collection fees, the cost of any compulsory insurance policies. The interest-only rate is called the nominal interest rate (TAN - Tasso Annuo Nominale).

Before signing a contract, you must be given a standard information sheet (known as the pre-contractual information document) containing all relevant details. Read it carefully, and compare offers from different providers-there are also online tools that can help you compare loan terms.

Although personal loans are widely available, it's a good idea to consider whether another product might suit you better-such as a salary or pension backed loan (cessione del quinto dello stipendio o della pensione) or a mortgage.

Some loans may include early repayment penalties: you could be charged a fee if you repay the loan ahead of schedule.

Keep in mind that a personal loan may cost more than other types of borrowing, especially if it is unsecured. However, some lenders may ask for a guarantor or require an insurance policy to cover certain risks, such as death.

The overall cost of the loan will depend on various factors, including the amount borrowed, the loan term, the interest rate, upfront fees and instalments, insurance costs, if applicable.

Some fees are fixed and do not depend on how much you borrow. This means they may weigh more heavily-in percentage terms-if your loan amount is small.

Risks

The main risk of taking out a personal loan is being unable to make your monthly repayments on time, or at all. This may happen if you haven't properly considered whether the repayments are affordable based on your income. If you miss payments or pay late, you may be charged additional fees and penalties, which are not included in the APR (Annual Percentage Rate), such as late payment interest - extra interest charged on the overdue amount for the entire period of the delay.

Payment delays or defaults will also have a negative impact on your credit record. This could make it harder for you to get a new loan in the future, either from your current bank or from another lender. Missed or late payments may be reported to private and public credit databases - such as the Bank of Italy's Credit Register-which are consulted by lenders when assessing loan applications.

In general, having multiple loans at the same time-such as a mortgage, a 'Buy Now, Pay Later' plan for a new TV, and a personal loan to pay for your child's wedding-can make it difficult to keep track of your debts and may put your financial stability at risk.

Before committing to any financial agreement like a personal loan, remember that unexpected expenses may arise during the loan period-such as healthcare costs, home repairs, or expenses related to your children. You may also face a sudden drop in income, for example due to losing your job.

You should use a personal loan only for important expenses - not to manage everyday spending.

Consumer protection

You are entitled to additional protections if your personal loan qualifies as a consumer credit agreement, which means:

• the money is not being used for business purposes or to buy land or real estate;
• the loan involves payment of interest or other charges;
• it is not secured by a mortgage on property;
• the loan amount is between €200 and €75,000.

In these cases, you have the right to:

• withdraw from the contract (cancel it) free of charge and without giving a reason, as long as you notify the lender within 14 days of signing the agreement;
• repay the loan early, either in full or in part, without penalty and with a reduction in costs proportionate to the shorter loan term. The lender may charge you a small fee to cover the administrative cost of early repayment, but only within legal limits;
• receive the SECCI form - the Standard European Consumer Credit Information - a clear and standardised information sheet designed to help you compare offers and make informed choices.