Things to consider before taking out a loan

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Published on 11/07/2025

On a hot summer's day, it’s hard to resist the lure of an ice cream. The instant gratification often makes us forget that we’ll later have to compensate by eating fewer calories. Taking out a loan is not all that different: enjoying the immediate benefit of buying a new TV, a car, or even a home can be tempting, but we must remember that the money will need to be repaid—with interest.

Be mindful of the costs

Borrowing money boosts our spending power in the short term, but repayments usually start almost straight away. This means we'll need to manage our budget carefully, as a portion of our income will be tied up in repaying the loan.

Borrowing is never free. In addition to paying back the amount borrowed (the capital), we'll have to pay interest. This means that if we borrow €100 today, we'll pay back more than €100 in the future. Interest compensates the lender for both the risk of not being repaid and for giving up the use of their money during the loan period. As a general rule, the longer the loan lasts, the lower the individual instalments—but the total amount of interest paid will be higher.

Interest rates can be fixed or variable. A fixed rate gives us the certainty of paying the same amount every month, making it easier to budget. A variable rate, on the other hand, means repayments can go up or down over time. This makes it harder to predict how much the loan will cost overall. If we want to avoid the risk of rising repayments, a fixed-rate loan is usually the safer choice. However, if we're comfortable with a bit of uncertainty and willing to accept the possibility of higher instalments, a variable-rate loan might allow us to benefit from lower interest rates in the future.

Loans often involve extra charges besides interest. These can include arrangement fees, collection charges or compulsory insurance. Even if a loan is advertised as having zero interest (with a nominal annual rate or TAN of 0%), there may still be other costs to consider. To understand the real cost of borrowing, we need to look at the Annual Percentage Rate of Charge (APR, known in Italy as TAEG), which includes most fees and charges. A loan is only truly free of cost if the APR is zero.

Take time to assess and compare

Before applying for a loan, it's important to:

• Consider whether we really need it. Is it worth limiting our future spending just to buy something now? Borrowing is expensive, and it creates a long-term financial obligation.
• Check whether we can afford it. A useful guideline is that our total monthly repayments shouldn't exceed 30% of our disposable income. Rather than borrowing the full amount we're offered, it's usually wiser to borrow only what we actually need. That way, we're less likely to have to make big changes to our lifestyle.
• Compare different offers. Not all loans are equally priced. For instance, revolving credit cards are often more expensive than personal loans. Banks and other credit providers are required by law to give us standardised pre-contractual information: the European Standardised Information Sheet (ESIS) for mortgages, and the Standard European Consumer Credit Information (SECCI) for consumer credit.
• Comparison websites can be a useful starting point, but as they are generally run for commercial purposes, it's important to double-check the actual terms of the loan using the official documents mentioned above.

If repayment becomes difficult

If we're struggling to keep up with repayments, it's essential to contact the lender as soon as possible to try to find a workable solution. Lenders usually have an interest in agreeing a repayment plan that works for both sides.

The legal protections available depend on the type of credit agreement we've entered into. If we believe the lender has acted unfairly or in breach of regulations, we can submit a complaint directly to them. They must respond within 60 days. If the response is unsatisfactory or we don't receive one in time, we can take our complaint to the Arbitro Bancario Finanziario (ABF)—the Italian Financial Banking Ombudsman.

That said, it's always the lender who decides whether to approve a loan. They'll assess our personal, financial and income situation before granting credit.

Remember: taking out a loan is a serious financial decision with long-term consequences. Taking the time to evaluate it properly is the first step towards using credit wisely and responsibly.