Have you ever wondered why financial institutions ask you for IRS proofs and pay stubs when you apply for a loan? The truth is that it is through these documents that banks can calculate their effort rate and thus decide whether or not to grant the credit in question.
Financial institutions are increasingly judicious in lending, and as such, they need some documents that represent their customers’ consumption history. In this way, they can see whether or not the loan will be too high a burden on the consumer.
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The effort rate is nothing more than the percentage of the total household income earmarked for the payment of credit installments hitherto contracted.
In essence, it corresponds to the income available to cover daily expenses (such as food, transport and fuel, education and leisure) after payment of monthly obligations with credits previously contracted.
This rate should not exceed 33% or one-third of the total household income.
It should also be pointed out that in the case of a mortgage loan since it is a very large loan, many banks place a maximum limit of 40% on the effort rate of the holders for the approval of the financing.
This makes sense in that, as a general rule, the provision of the home is usually the highest monthly burden of the family budget, avoiding future situations of over-indebtedness in case of unexpected changes in the economic context of families, such as unemployment or illness prolonged
How to calculate?
Note that monthly expenditures for electricity, water, gas, and telecommunications are not taken into account in the calculation of the effort rate, only counting the financial charges with monthly credit installments (credit card, personal credit, automobile credit, among others).
However, be aware that if you do not have a home loan but are paying for a leased house, this amount should be included in the expenses with financial charges.
To calculate your effort rate, still at a preliminary stage – in order to be informed and aware when you go to your account manager – you just need to perform the following calculation:
Effort Rate = (Financial Charges / Total Aggregate Net Income) x 100
Effort rate simulator
To find out your effort rate, download the simulator below. Fill in the fields indicated in the file with your income and your fixed monthly expenses and find out if your effort rate is within the limits accepted by the banks in Portugal.
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When the effort rate is substantially high, this shows that a large part of the household income is allocated for the payment of bank loan installments.
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It should be borne in mind that other income, such as invalidity or widowhood pensions, family allowances and even other work in which the person makes the appropriate deductions, are also treated as income and will be taken into account in calculating this percentage.
If your effort rate is very high, we suggest you try to renegotiate the credit. This way you can get better conditions and reduce your effort rate by extending the payment term. On the other hand, you can choose to transfer your loan (although this solution is more common in mortgage loans) to find better financing conditions in another institution.
If you have several payday loans, we advise you to consolidate all of them into one at this main site. This way you can extend the payment period or even reduce the interest rate and you will pay only a monthly installment, which will help to improve your effort rate and, consequently, gain more flexibility in the management of your family budget.